The Impending Corporate Debt Crisis

The Impending Corporate Debt Crisis

The last major economic crisis wasn’t that hard to see coming. Certainly anyone in the real estate business in 2005 knew there was a problem, as did anyone who was paying attention to the financial news. So called “liar loans” and second mortgages were common and many knowledgeable people sounded warnings about real estate valuations and the trend toward people of modest means buying much more house than they could ever afford.

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What fewer saw coming, when the crisis finally struck in 2007, was the credit market collapse. The credit markets locking up was actually what did most of the economic damage during the Great Recession. Certainly, the real estate industry was decimated but we could have struggled through, if that were the only problem. It wasn’t just the mortgage industry locking up; no company could borrow money, for anything. Even giant multi-nationals like General Electric suddenly couldn’t borrow money to make payroll. That lack of credit in an economy driven by debt was the real disaster. The housing market was the spark; the credit market was the explosion.

Today once again we’re in a position where the credit markets are signaling trouble. Instead of the mortgage credit market, this time it’s the corporate credit market shooting up flares. How we got here is depressingly familiar. The Federal Reserve kept the free money fountain flowing for years, well after the stock market recovered. One of the Fed’s priorities is employment and employment was slow to recover after the Great Recession. So, the Fed kept the money flowing and companies took on more debt. The Fed warned, loud and clear, that the free money lunch wasn’t going to last forever, but they warned so much and delayed so long that corporate execs simply quit listening as ever-increasing debt piled up on corporate balance sheets.

One of the industries piling up a lot of debt was the oil and gas industry. This isn’t unusual, as oil and gas extraction is a capital-intensive enterprise. So now the Fed decides it’s really time to raise interest rates – just as oil prices are being hammered by the strong dollar. Added to that are the actions of Saudi Arabia, a country that does not have our best interests at heart, and pumping ever more oil as prices crashed below $40 a barrel. For the U.S. oil and gas industry, that is the perfect storm of disaster, a worst case scenario.

Every economic disaster has a spark. The debt levels and crashing oil prices of the U.S. oil and gas industry would seem to have the potential to make an excellent detonator. Yet the oil and gas industry is not alone in debt distress. Metals, mining and steel are also feeling the pinch, along with virtually any commodity-driven business.

In December the index that tracks companies in debt distress reached its highest level since 2010. Rising interest rates coming at a time of profit softness for many companies has pushed the bond market risk levels to heights not seen since 2009, when the country was in the midst of a recession.

How all this will play out is still not entirely clear, although it doesn’t paint a particularly rosy economic picture for 2016. The danger signs are real; posing a significant enough risk today to justify a defensive posture by small investors.

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With continued downward pressure on commodities and a strong dollar, 2016 is shaping up to be another good year to exercise caution toward any paper investments and stick to a gradual process of accumulation of hard assets. As things are, even this early, this new year just looks too risky.

Trevor Gerszt, America’s Gold IRA Expert, is founder and CEO of Goldco Precious Metals, a privately held retirement services firm in Los Angeles specializing in wealth and asset protection. Trevor also holds a position on the Los Angeles Board of the Better Business Bureau.

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