Companies in the U.S., China, Japan, the U.K., and the eurozone will need a staggering $30.0 trillion in new money to refinance corporate debt within the next five years (source: Standard and Poor’s Rating Services).
Because of all the problems in the world that could prevent corporate debt from being refinanced, S&P believes a perfect credit storm could be brewing. I wholeheartedly agree with them.
I believe the eurozone mess coupled with the global economic slowdown that will eventually lead to weaker corporate profits is going to severely hamper the refinancing efforts of trillions of dollars in corporate debt.
The possible breakup of the eurozone and the continued recession in the eurozone could make the refinancing of corporate debt in those countries very difficult. The eurozone banks and the countries themselves already have finances that are very strained.
Just yesterday, we learned the European Central Bank stopped lending to some large Greek banks for the first time.
The U.K. faces similar types of issues, although not as severe as the eurozone. The U.K. is mired in recession, but does possess its own central bank that can print money to help the banking system and so the corporate debt market. Print, print, print!
China is in the enviable position of sitting on plenty of foreign reserves (U.S. dollars). If China sees its corporate debt market needs money, China can dump some of these reserves to help its banks and so its corporations.
On the other hand, Japan has massive debt problems. It will certainly print money should its corporate debt market require it.
The situation in the U.S. is very different.
U.S. non-financial corporations are in good shape, because they are holding so much money on their balance sheets. I would argue that corporations are holding money on their balance sheets because they are scared of another financial crisis like 2008.
U.S. companies don’t want to be cut out of the corporate debt market like they were in 2008, so they are sitting on a record amount of cash.
S&P notes that the biggest risks to the multi-trillion-dollar corporate debt market—an opinion I agree with—are the eurozone crisis, the slowing U.S. economy, the slowdown in China, and the continued unrest in the Middle East, which could send oil prices skyrocketing.
The amount of corporate debt that needs to be refinanced in the next five years is staggering. In our history, we never had so much corporate debt coming up for maturity at one time.
And because there are so many possible problems in the world, I wouldn’t be surprised to see the corporate debt market experience severe strain.
If this is the case, dear reader, it will further exacerbate the economic slowdown, placing us on the path to recession. Corporations create jobs and impact growth. If they can’t finance their corporate debt, the repercussions will be severe.
How is America faring?
To find the answer, in the past month, I have visited New Jersey, New York, Boston, Palm Beach, and Miami.
Of these five cities (surprise), New York is doing the best. Almost looks like the credit crisis never happened here. Restaurants are full. A new condo building popping up at 432 Park Avenue is asking $6,000 per square foot and getting it. The housing market is hot.
In New Jersey and Boston, the housing market has improved, but it’s far from booming. People are simply happy to have jobs. The amount of money people make at the executive level (I find) is not what it used to be before the credit crisis hit. Students that are graduating with degrees are having a very difficult time finding jobs; hence they are taking transition service-oriented jobs.
Palm Beach, one of the wealthiest enclaves in America, has yet to recover from the credit crisis and from Bernie Madoff. In respect to this housing market, many multi-million-dollar estates are on the market, waiting for that sports figure, well-known entertainer or an Internet billionaire to come along.
In Miami, unemployment is a big problem. The housing market is improving, but only marginally. What’s really happened is that many foreclosures in the housing market have been absorbed. Getting financing to buy a home is difficult. Most people I talk to are still underwater on their homes (owe more than they are worth), but do not want to leave. In reality, I find it a terrible, terrible housing market.
My impression is that people in south Florida are just scraping by. Tourism is keeping Florida going. Take tourism away, and goodbye Florida.
From my various visits, my present impression is that America will not able to sustain another setback like the credit crisis of 2008. There is a growing disparity between the rich and poor with the latter living paycheck to paycheck. The housing market across the country is still in pain, with prices down about 30% since the crisis hit.
Retirees are taking part-time jobs to supplement their income, putting pressure on the strained job market.
I do not see the picture ending well. Years of zero-interest-rate policies and money printing represent attempts to help the economic situation and housing market in the immediate term, but they provide substantial long-term downside risk…as we will soon find out.
Where the Market Stands; Where it’s Headed:
Last fall, I circulated a report that stated the stock market would start to crash in the U.S. on or about April 13, 2012. I was exactly two week early. From the end of April to yesterday, the Dow Jones Industrial Average has collapsed 740 points, or about six percent.
But we should not be afraid. Yesterday, we got news that several members of the Federal Open Market Committee (the Federal Reserve) said that more monetary easing may be required. As I have been predicting for months, as soon as the stock market started to pull back, QE3 would be on the table again.
What a concept. Stock market and economy start to go down; we just print more money to get them both moving again. How long can this process go on for? How long can the Fed fight the natural forces of a secular bull market?
The bear market rally in stocks that started in March of 2009 is getting close to the end of its cycle. I have been warning my readers that the limited upside for the market may not be worth the risk.
What He Said:
“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that, when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.