Endangered Recovery
As we noted in a recent corporate debt update on occasion of the troubles Neiman-Marcus finds itself in (see “Cracks in Ponzi Finance Land”), problems are set to emerge among high-yield borrowers in the US retail sector this year. This happens just as similar problems among low-rated borrowers in the oil sector were mitigated by the rally in oil prices since early 2016. The recovery in the oil sector seems increasingly endangered though.
Too many oil barrels are filling up again.
Photo credit: Kay Nietfeld / DPA / Corbis
Here is a chart we have frequently shown in the past, which illustrates the y/y change rate in commercial & industrial loan charge-offs plus delinquencies in comparison to junk bond yields (the federal funds rate is added for good measure):
Year-on-year rate of change in charge-offs + delinquencies of C&I loans (black, lhs) vs. junk bond yields (blue, rhs) and the FF rate (red, rhs) – click to enlarge.
To avoid misinterpretations of this chart, note that the big surge in the rate of change of charge-offs/delinquencies obviously started from very low levels. In absolute terms it came nowhere near to the levels that were seen in 2008 – 2009. Both the increase in charge-offs and delinquencies and the improvement over recent quarters closely tracked the problems and subsequent recovery in the oil & gas sector as the oil price plunged from late 2014 to early 2016 and then rebounded.
Whether the expected surge in retail sector defaults this year will have an impact on this statistic remains to be seen of course. The surge in junk bond yields from the 2014 lows to the early 2016 highs and the subsequent decline close to previous lows were likewise largely related to the energy sector, which is home to a great many junk-rated borrowers.
They happen to borrow quite tidy sums as well, so these developments are not inconsequential from a wider economic perspective. In recent years US capital spending growth and data reported by the manufacturing sector (especially by producers of capital goods) appeared to be quite closely correlated with the fate of the oil sector as well, or more precisely, the fate of the fracking industry.
All of this must be brought into context with monetary policy. Large increases in the money supply and the associated decrease in interest rates tend to drive up prices of factors in the higher stages of the production structure, i.e., those that are temporally distant from the consumer goods stage. As an aside to this, readers may wonder why the retail industry is facing problems if that is so – to this one has to keep in mind that over-consumption is a feature of the boom as well, as is the fact that investment is derailed into the wrong lines. These are the factors affecting the retail sector.
The main “beneficiaries” of the boom are always specific sectors of the economy, which absorb a particularly large share of investment financed by …read more
Source:: Acting Man
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