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” re awaiting fomc minutes tomorrow after fed chair jerome powell addressed concerns over rising levels levels of corporate debt yesterday let s watch as of now business net debt does present the kind of elevated risks to the stability of the financial system. That would lead to broad harm to households and businesses should conditions. Deteriorate at the same time the level of debt certainly could stress borrowers. If the economy weakens.
We have danielle dimartino booth. A quill intelligence ceo and former adviser to the president of the dallas fed and daniel we just heard what fed chair jerome powell was saying yesterday and when we talk about corporate debt there s some people that are acquainting it to the subprime mortgage crisis. There are others are saying that hey there s actually not that much to worry about here. What do you think of all this well.
I think the excesses are kind of in our face. We ve got total business debt because we ve had so much leverage lending and other kinds of lending that s not necessarily smack in that corporate debt bucket. But we do when you add it all up together in in 2009. We hit a high of about almost 74 percent or over 73 percent today so we re back at that excessive level.
The problem is there are fewer protections. You ve read about covenant light lending than there were before and it s also a matter of the fact that it s gone global and that was the problem with the subprime crisis right with the first time we saw subprime problems pop up was in some german landis bank..
Which we didn t even know what they were at the time their small commercial commercial real estate banks. So what what i see is the ability for there to be a daisy chain. Because there s so much of it and we don t know all that we need to know about it and so much is in private equity. Which the fed does not regulate just like the fed did not regulate a lot of the subprime lenders.
I see far too many parallels well i put this in terms for us just because we ve been talking about the risk that the trade war poses to the economy. We ve been talking about the fact that we could see a potential global slowdown when you take all that into account you also take into account a corporate debt. I mean what do you think is the biggest risk to the us economy as it stands right now well look. We we were assist to be a one in denver s is to have one quarter of negative earnings and it wasn t just to go into the into the second now we re now this this could potentially in this current recovery be the third earnings recession in other words two quarters consecutive quarters of negative you on your growth in earnings to that you add this strain of the trade war.
We ve seen freight shipments go down five months in a row. You you you track that against gdp or any other type of a lagging economic indicator. It s not a pretty chart and that means that corporations are going to be pressured and their balance sheets are going to be pressured and their cash flow in earnings. That s not a good situation into which to add the fact that there s record levels of corporate debt.
I think that the fed needs to be doing a little bit more than monitoring. It closely yeah..
I mean when we talk about the two elements of the feds mandate at the one hand. We had the low the low employment figures at the other hand. We have low inflation so it almost means two different things should be happening. What do you think.
The feds next. Move will be if you could say at this point. Where it stands right now look. We ve seen fourteen consecutive months of year over year declines in home sales home prices have become we re going to decline in a lot of markets.
That is a huge input to inflation. There s not going to be anything transitory or transient as powell said in his most recent press conference about a decline in home prices. That s going to end up dragging those inflation figures lower. So not only are we going to have this non goldilocks anymore because you don t want to see these sectors continue to slow.
But the fed is going to have genuine ammunition and reason and license to lower rates as its next step because it s going to be following inflation lower. One of the other things we ve been talking about just..
A president trump s attacks on the federals trying to influence them ed just from your perspective. I mean how big of a distraction is that jerome powell and the rest of the federal reserve members well it s you know i would say and i have defended the fed all along they re not directly political. They don t answer to president trump when it came to me when it comes to making policy. But the fact that the market keys off of what the next.
Tweet is going to be makes it that much more difficult in their position as arbiters of financial stability. Because you ve got you ve got all kinds of asset classes. Bouncing all around. The high yield market is start started to get uncomfortable.
With this. That is really what caused. The powell pivot back in november. And december was when the masa nations in the in the stock market were sufficient to start to wake up that great big beast in the credit market that worked old burn not supposed to be worrying about i mean real quick do you expect any surprises in tomorrow s five minutes.
No i look. I think that there will be more talk..
Because every single fed speaker on the wires. Has had the same exact. It s as if they re all speaking from the same script. I think that there will be more speaking to the downside risks that they see in inflation.
And i think that the market will perceive that rightly as being dovish when those markets at tomorrow 2 pm. Maybe we could get a rally then tomorrow about noon will say or another tweet. Or another speech. Joe danielle.
Do you martina boot. Thanks so ” ..
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