In his latest outlook, Dr. John Hussman writes
The Federal Reserve’s policy of quantitative easing has starved investors of all sources of safe return, provoking them to reach for yield in more speculative assets, including equities, leveraged loans, covenant-lite debt, and other securities. Having stomped on the pedal for years, all of these asset classes are valued at levels that are strenuously elevated from a historical perspective, and as a result, offer strikingly poor prospective returns for long-term investors.
I’d compliment Mr. Hussman’s observation by showing the updated 1st quarter 2014 charts from the Institute of International Finance—a global trade group or association (cartel?) with over 450 members comprising world leading banks and financial houses, headquartered in 70 countries (Wikipedia)
From the IIF:
Global bond issuance continues with its record breaking streak led by Euro area bonds. While the Eurozone’s banking system remains broken as manifested by contracting banking loans and falling money supply, most of the Eurozone’s asset chasing dynamic have been financed by the rapidly growing bond markets.
Next global high risk mezzanine financing called “payment in kind” loans are at “a striking record highs”! Again a lot of this growth comes from the Eurozone.
Meanwhile another global high risk loan called “leveraged loans” (loans to highly indebted entities) have been running at growth rates at par with 2013.
Indeed markets, starved for returns have been desperately chasing markets by expanding debt exposure. Yet such exposure has extrapolated to a substantial decline in credit quality
The IIF conveys her worries and noted that
a rising proportion of corporate issuance has been done by high-yield issuers, increasingly of lower credit quality such as CCC and rising proportion of corporate issuance has been done by high-yield issuers, increasingly of lower credit quality
Aside from high yield (lower credit rating) loans or what are known as junk bonds, Covenant lite loans are loans with less restrictions on collateral, payment terms and level of income.
Any impression that emerging markets “reformed” following the latest tremors have been misplaced. While emerging market corporate bond issuance has marginally leveled off, government bond issuance soared to its highest level since 2005, mostly due to Eastern Europe.
In addition, international loan exposure by emerging market corporates led by the banks have materially increased since 2010.
So what we are seeing today has been a confluence of contradictory forces: rising risk asset markets being funded by ballooning debt—whose quality have been in a substantial deterioration—as bond yields suggest rising rates soon.
Such lethal combination inevitably indicates a forthcoming Wile E. Coyote moment.