Raoul Pal Says Corporate Debt Is The Next Recession’s Poster Child
Scroll through FinTwit for just a few minutes and you'll see plenty of commentators forecasting a recession, and Global Macro Investor and Real Vision Co-Founder & CEO Raoul Pal is one of them. In a new video for Real Vision, Pal identifies a few areas of concern, but primary amongst his fears is the state of the corporate debt market.
“In nominal terms, [corporate] debt is now $10trillion...It was one of the largest increases of debt we've ever seen in history in 10 years, a truly monumental debt build up” says Pal. He says this corporate debt binge has been used primarily for share buy-backs, something that has gotten the attention of some of the Democrats campaigning for their party’s nomination to challenge President Trump in the next U.S Presidential election (assuming he's the Republican nomination).
“This debt has been basically used for one thing, that's equity buybacks. They bought back more equity than any other time in history. In fact, they've been pretty much the only buyer of the equity market. If we look at all forms of other equity market ownership, they've been all in decline for the last five years, while buybacks have been stepping up, stepping up taking into account all of the net sellers and pushing the market higher” Pal said.
Pal continues to analyze the lowering of the credit quality of the overall market (saying that half of the entire bond market is BBB – one notch above junk) and says that, because a recession will result in some BBB bonds getting downgraded to junk, there aren’t enough junk bond buyers to pick up the extra capacity, resulting in an insolvent junk bond market. Add to that the necessity for some of this corporate debt to be renewed, and banks being unwilling (in a recession) to play ball, “This corporate thing is an avalanche waiting to happen. And the butterfly has flapped its wings, and the avalanche is starting to crumble. This is why the Fed needs to cut rates and needs to cut rates fast.”
You can catch the full video here.
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