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One thing I'm interested to see if anyone can discuss what's different this time (i.e, Fed has ~4x more assets on it's balance sheet [and the roll-offs], corpor

One thing I'm interested to see if anyone can discuss what's different this time (i.e, Fed has ~4x more assets on it's balance sheet [and the roll-offs], corporate have ~2x more debt, labor force participation rate is at levels not seen since the 60's, 4 eurodollar "events" since, US gov debt levels since) and how it could theoretically affect the yield gymnastics? Some banks keep saying 2020 is the big one since that's when most of the corporate debt will be need to rolled over onto higher rates, but I'm of the mind we don't even make it that far because of even shorter term liabilities (think corporate buybacks with debt at higher rates that will increasingly put pressure on balance sheets m/m, liquidity pressure risk assets, devaluation on collateral) in this environment.

schlumpf 8y ago
Good questions. Two differences to consider vis a vis past late cycle moments: US corporate profits haven't peaked, and the politicians could have a better claim on being part of the problem than on being part of the solution. I was tempted to add "leverage" but that's too slippery for a concise discussion. Profits: it took about two years peak-to-trough for profits/GDP to correct during the past two recessions. Unless you see sudden stop risk, this suggests the US corprorate sector isn't staring down the barrel of a massive deleveraging...yet. Politics: public support for legislative non-compromise does not speak to the kinds of policy fixes applied in 2008-9. Executive belligerence toward the Fed doesn't seem helpful either. As much as markets may have appeared to ignore US political risks while momentum was positive, it seems credulous to think this more of a divorce than a separation. There are other quantitative arguments that the turn in the cycle is not here yet (e.g. employment, notwithstanding participation rate). But the prospect of a return to political gridlock is, to me, the most important risk contrast with recent past cycles.

schlumpf 8y ago

Good questions. Two differences to consider vis a vis past late cycle moments: US corporate profits haven't peaked, and the politicians could have a better claim on being part of the problem than on being part of the solution. I was tempted to add "leverage" but that's too slippery for a concise discussion. Profits: it took about two years peak-to-trough for profits/GDP to correct during the past two recessions. Unless you see sudden stop risk, this suggests the US corprorate sector isn't staring down the barrel of a massive deleveraging...yet. Politics: public support for legislative non-compromise does not speak to the kinds of policy fixes applied in 2008-9. Executive belligerence toward the Fed doesn't seem helpful either. As much as markets may have appeared to ignore US political risks while momentum was positive, it seems credulous to think this more of a divorce than a separation. There are other quantitative arguments that the turn in the cycle is not here yet (e.g. employment, notwithstanding participation rate). But the prospect of a return to political gridlock is, to me, the most important risk contrast with recent past cycles.