Another Nail in Rate Hike Coffin: Debt Distress Level Highest in Five Years

Peter Schiff has been saying that the December Federal Reserve interest rate hike is likely a one-and-done deal, with rates going back to zero or lower, and another round of quantitative easing in the cards for 2016. Peter insists that the US economy isn’t in good shape, and it can’t even sustain the recent small rate hike, much less the series of increases promised by the Fed.

Another bit of news came out this week that seems to further reinforce Peter’s position. As USA Today put it, “Higher interest rates are about to hit companies—just when many are ill prepared to handle them.” In fact, the number of companies with the lowest credit rating jumped to the highest level in five years this month:

The number of companies with the lowest credit ratings and negative outlooks jumped to 195 in December, the highest level since March 2010, says Standard & Poor’s. The biggest culprit for the jump in these so-called ‘weakest links’ is the oil and gas sector, which accounts for 34 of them. But financial companies are close behind, representing 33 of the weakest links, says S&P.”

This offers yet another sign the Fed picked a really bad time to jack up interest rates. When rates go up, the cost of servicing debt increases, and a lot of companies simply can’t handle it right now. According to USA Today, the distress ratio has hit a level not seen since the last recession, indicating a lot of companies are in no position to absorb these additional costs:

The bond markets are starting to factor in the dangerous combination of rising interest rates as well as profit weakness in several sectors. The US distress ratio – a measure of the amount of risk the market has priced into bonds – hit 20.1% in November, which is the highest level since hitting 23.5% in September 2009, says S&P. That’s an onerous indicator since September 2009 takes investors back to the last recession.”

Even before the Fed’s move, Peter was saying the original rate hike “liftoff” promised by the central bank was looking more like a hoverboard. In other words, the Federal Reserve will not be able to sustain a series of rate hikes over the next year. The economy can’t handle it. Peter isn’t alone in his thinking. A majority of mainstream economists agree that the Fed won’t be able to sustain rising interest rates over the long haul.

The distress ratio and debt problems faced by many US companies represents yet another nail in the rate hike coffin. As Peter put it in an interview with Fox Business right after the hike, every economic indicator is flashing recession, except for the jobs market. That’s because bad employment numbers generally lag behind other indicators since companies don’t typically lay off workers before an economic downturn. Peter insisted during the interview there is no way in the world payrolls will continue to grow as rapidly as they have been. That likely means more easing ahead.

I think they’re doing QE4 next year. That’s the problem. And not because any of this works. It doesn’t work. We are trapped in this… The gold market is going to like it…”

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