A sign of our times: news today that Russia is letting many of its impossibly indebted citizens declare personal bankruptcy for the first time, see Russia prepares for wave of bankruptcy filings.
The epidemic of debt is global and holding back consumption everywhere. Write-offs are part of the way back to fiscal health but this also will mean write-downs to asset values that were presuming full principle repayment. Corporate bonds have begun repricing. So called ‘high yield’ bonds (HYG in green) have been falling for 15 months, but are so far off just 12% on average, even as many individual issues are down much more. A price correction of greater than 20% would be historically normal at the end of credit cycles as defaults surge. At the end of what has been the most extreme, secular, credit cycle in history, the price declines could easily be more in the 20 to 50% range.
And its not just ‘junk’ bonds. Higher grade corporate bonds (LQD index in blue below) have been falling too. Off 3% year to date, there is most likely further price declines for corporate bonds coming, as they too have been trading at rich premiums the past couple of years on QE-inspired over-confidence. As shown here, stocks (S&P 500 in red) and corporate bonds have been following their traditional correlation since June, as stocks finally recoupled with corporate bond prices once more.
The majority of businesses and households will not go bankrupt but will have to restructure and reduce spending in order to work their way back to much lower debt levels over the many months ahead. Making the income statement work with lower cash flows is critical in this brave new world of spending less in order to pay down debt and rebuild savings.
The Atlanta Fed’s GDPNow update seems to concur, with today’s US annual GDP forecast dropping below 1% once more, even as the deliriously optimistic consensus continues to call for 2.4%.
Oil too appears to be processing the slower growth memo. (We thought that it would.) Now below technical resistance (band marked below), coupled with still weakening fundamentals, lower lows seem likely ahead.
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