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The market cap from US companies has grown from 19 to 32 trillion in the same period. [0] It’s not accurate to look at single variables in isolation. Problem

The market cap from US companies has grown from 19 to 32 trillion in the same period. [0] It’s not accurate to look at single variables in isolation. Problems happen when the aggregate debt in an economy exceed the assets behind them, or the capacity to pay them down. [1] If we are there it’s because of govt and consumer (mortgage) debt. On the corporate side I think it’s just balance sheet efficiency. (Can write off debt payments) [0] https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?start=2007 https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?start=20... [1] https://en.m.wikipedia.org/wiki/Minsky_moment https://en.m.wikipedia.org/wiki/Minsky_moment

roymurdock 8y ago
An increase in interest rates ~2% could trigger a large number of junk corporate bond defaults, according to the latest McKinsey analysis The trigger for interest rates rising by that much in a short period of time is not apparent and/or explored in the article, and frankly I don't see one, but that would be the real worry, and would probably have a large, negative effect on junk government bonds as well https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/rising-corporate-debt-peril-or-promise https://www.mckinsey.com/business-functions/strategy-and-cor...
Novashi 8y ago
Of course another variable is whether there will be another bailout if this goes off.
- lotsofpulp 8y ago
  Considering how many wealthy (and not so wealthy) voters are invested in large public corporations, I assume bailouts will happen.
Jimpulse 8y ago
What if the market cap is fueled by the corporate debt? Doesn't that strengthen the article's position?
revel 8y ago
Overall corporate debt levels are at record highs, but the bigger problem is highlighted in the article -- the quality of debt has degraded substantially. There are a ton of companies that have been skating along at BBB/BBB- (in S&P parlance) on the brink of junk bond status. If they get downgraded mutual funds have to dump them. This creates downward pressure on debt and makes it harder for those companies to refinance. In turn, this pushes up credit spreads. This is a viscous cycle and it's going to be extremely nasty for anyone holding either high yield debt or equities. That's the debt bomb that should worry investors. Since we're on HN, this will also make it far harder for entrepreneurs to raise money since there's now a ton of competing high yield debt opportunities for investors to take advantage of. If anyone wants to dump a few million into a really awesome startup before that happens, let me know!

roymurdock 8y ago

An increase in interest rates ~2% could trigger a large number of junk corporate bond defaults, according to the latest McKinsey analysis The trigger for interest rates rising by that much in a short period of time is not apparent and/or explored in the article, and frankly I don't see one, but that would be the real worry, and would probably have a large, negative effect on junk government bonds as well https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/rising-corporate-debt-peril-or-promise https://www.mckinsey.com/business-functions/strategy-and-cor...

Novashi 8y ago

Of course another variable is whether there will be another bailout if this goes off.

lotsofpulp 8y ago
Considering how many wealthy (and not so wealthy) voters are invested in large public corporations, I assume bailouts will happen.

Jimpulse 8y ago

What if the market cap is fueled by the corporate debt? Doesn't that strengthen the article's position?

revel 8y ago

Overall corporate debt levels are at record highs, but the bigger problem is highlighted in the article -- the quality of debt has degraded substantially. There are a ton of companies that have been skating along at BBB/BBB- (in S&P parlance) on the brink of junk bond status. If they get downgraded mutual funds have to dump them. This creates downward pressure on debt and makes it harder for those companies to refinance. In turn, this pushes up credit spreads. This is a viscous cycle and it's going to be extremely nasty for anyone holding either high yield debt or equities. That's the debt bomb that should worry investors. Since we're on HN, this will also make it far harder for entrepreneurs to raise money since there's now a ton of competing high yield debt opportunities for investors to take advantage of. If anyone wants to dump a few million into a really awesome startup before that happens, let me know!