Companies are taking on more debt. This is no secret. Last quarter, we saw the end with $10.5 trillion in corporate debt out there. This is a record sum, an amount that is likely to keep growing with interest rates so low.
In this video I discuss how this could post a danger to the economy and some of the warning signs we already have.
▶️ 3Speak
How concerning is this and how fast can this turn into a global disaster?
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@shtup it can happen so fast and that is why the debt needs to be stopped to avert the dangers it can cause...
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Unfortunately, most companies currently establish themselves on borrowing or investing funds from people. All this drives them to accumulate debts on them.
It is very dangerous for the economy and we may witness a financial crisis, as happened in 2008.
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@taskmaster4450le something urgent needs to be done to stop this looming danger which can wreck the entire world economy...
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I don't like the high yield bond market right now. It's all speculation since it also includes zombie companies. Do they really expect those companies to pay out? I think its more likely they go bankrupt. The FOMO in the stock market is too crazy.
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Summary:
Task discusses the state of the corporate bond market in the United States, emphasizing the significant increase in corporate debt since the 2008 financial crisis. He mentions how companies are taking advantage of low-interest rates to raise capital through the bond market and highlights the risks associated with the massive amount of corporate debt. Task explains how a rise in interest rates could lead to catastrophic consequences, especially for companies with high levels of debt. He also touches upon the impact of downgrades, the role of the Fed in buying bonds, and the potential ripple effects of defaults in the bond market. Task concludes by warning about the risks posed by the continuously growing corporate debt and the potential implications if it continues to rise.
Detailed Article:
Task delves into the corporate bond market, expressing his concerns about the increasing corporate debt levels in the United States. He notes that the total corporate debt stood at over ten and a half trillion dollars by the end of the fourth quarter, attributing this surge to companies leveraging low-interest rates to raise funds. He explains how companies are opting for the bond market over depleting their own reserves, given the favorable borrowing conditions. Despite the advantages of low-interest rates, Task warns of the risks associated with the massive amount of corporate debt held by companies.
Task highlights the concept of "zombie companies," which are essentially firms that are solely able to service the minimum debt payments, leading to a lack of investment in growth or expansion. He underscores the economic strain caused by such entities and points out that the economic downturn in 2020 resulted in a significant number of downgrades, indicating the financial struggles faced by many companies.
The discussion moves on to the distinction between investment-grade and junk bonds in the market, with Task explaining the implications of companies transitioning from investment-grade to junk status. He also mentions the involvement of the Federal Reserve in purchasing bonds, albeit not extensively, which he views as a positive sign indicating the stability of the market for the time being.
Task emphasizes the potential consequences of rising default rates in the bond market, which could trigger fear and lead to tightening lending standards. He explains how market uncertainties could drive investors towards safer investments, causing a surge in interest rates for risky debt, thus restricting the financial options for companies.
In conclusion, Task alerts the audience to the overlooked dangers posed by escalating corporate debt levels, painting a worrisome picture of a potential ticking time bomb if the trend continues unchecked. He urges vigilance and emphasizes the need to closely monitor the corporate debt market, pointing out the magnitude of potential consequences if the current trajectory persists.