The Federal Reserve has issued another warning about corporate debt.
But the Fed’s concerns seem a bit ironic considering its own easy-money policies have made all of this borrowing possible.
After Jerome Powell indicated that the Federal Reserve tightening cycle was on pause during last week’s FOMC meeting, Peter Schiff said, “The monetary drug pushers at the Federal Reserve gave the addicts on Wall Street exactly the fix that they had been craving.”
Peter often compares the markets to drug addicts. They are addicted to the easy money the central bank provides. Reuters used that same imagery to describe America’s business community in the wake of the “loose money era,” saying it left a “trail of US corporate debt junkies.
Bankers, investors and executives are increasingly worried about corporate debt, according to a Reuters report.
Specifically, the concerns center around “leveraged lending.” These are loans made to firms already deeply in debt. Think subprime loans for corporations. As the Reuters report put it, “the concern is that the loans would be difficult to either collect or resell in a downturn, putting both the borrower and lender at risk.”
While mainstream pundits and talking heads cluck about great jobs number and amazing economic growth, by and large, they completely ignore the fact that the entire economy is built on giant piles of debt.
In our Friday Gold Wrap podcast last week, Mike Maharrey talked about the fact that the economy is drowning in debt, focusing on ever-increasing consumer debt and government debt. He didn’t even get into corporate debt.
So, just how much debt is really out there? The following bullet points will give you a good birdseye view of the debt stretching from horizon to horizon.
To a large degree, the Federal Reserve drives the US economy, and it looks like it’s about to drive it into a ditch.
After pushing easy money policies for nearly a decade, the Fed wants to tighten things up. In 2015, it began nudging interest rates higher and it recently embarked on a policy of quantitative tightening to shed assets from its balance sheet. In other words, we’ve reached the peak of the credit cycle and we’re about to hit the downward slide.
There has been a lot of volatility in the stock market over the last couple of months. Peter Schiff has been saying we are already in a bear market. But most mainstream analysts remain upbeat. They insist the recent volatility is normal. The economy is picking up steam. Inflation remains tame. The jobs market continues to grow. Everything is great!
But there are realities underlying this market few people seem to be paying any attention to, and they reveal a serious disconnect between corporate America and Wall Street.
Companies are drowning in debt.