Amid Market Viral and Spiral

Update 417: Amid Market Viral and Spiral,
A Survey of Business and Consumer Debt

In the midst of the coronavirus panic, the Dow plummeted 1,191 points yesterday — the biggest single-day point drop in history. This past week, the S&P 500 dropped 12 percent, making this a full-blown market correction from nowhere in just six trading sessions, a record. 

While people have their eyes on equities this week, let’s not overlook risks in the debt markets. As we know too well from 2008, bad debt can accelerate an already suffering economy towards disaster. Below, we examine the historic levels of business and consumer debt and their impact on financial stability.

Good weekends, all…

Dana

_________________

In 2019, household debt reached $14.15 trillion after 22 consecutive quarters of increases, per the Federal Reserve Bank of NY. Non-financial business debt topped $16 trillion last year. These numbers got headlines and reveal worries that companies and consumers, fueled by cheap financing, are again marching the economy to the leveraged ledge. 

Since not all debt is created equal, we examine not only the levels of debt but its composition and who is introducing the most risk into the financial markets. Below, we survey the current state of debt from both the business and consumer perspectives. 

The Rise of Risky Business Debt

In nominal terms, non-financial business debt has been steadily on the rise since the Great Recession. But the $16 trillion milestone is not a cause for alarm in and of itself. What’s notable about trends in business debt is not the overall debt level but what types of financial instruments are driving businesses’ borrowing. In its February 2020 Monetary Policy Report, the Fed pointed to the growth of business debt among the riskiest borrowers as a threat to financial stability.

  • Leveraged and Covenant-Lite Loans: Leveraged loans are loans extended to companies that already have high levels of debt and poor credit. Currently, over $1.2 trillion, the market for leveraged loans has more than doubled since 2013. WSJ reported in 2019 that nearly 80 percent of outstanding leveraged loans were so-called covenant-lite (cov-lite) loans. In 2006, cov-lite loans were just six percent of outstanding leverage loans. Cov-lite loans place fewer, if any, restrictions on borrowers. 

The sharp rise in cov-lite loans has been a boon for businesses but has also arguably increased risk within the broader business debt market, particularly for banks issuing cov-lite loans. It isn’t hard to see parallels between the leveraged loan market and the subprime mortgages that ignited the 2008 financial crisis.

Share of Leveraged Loans That Are Covenant-Lite:

Source: The Wall Street Journal and LCD – S&P Global Market Intelligence

  • Collateralized Loan Obligations: Collateralized loan obligations (CLOs) are securities comprised primarily of leveraged loans of varying maturities and quality. In 2019, the market for CLOs totaled $660 billion — 54 percent of the leveraged loan market. This market has grown considerably since 2014, when outstanding CLOs totaled only $350 billion. Similar to the collateralized debt obligations (CDOs) that fueled the 2008 financial crisis, CLO managers slice the CLOs into tranches based on risk and market those tranches to investors with various risk appetites.

    In 2018, a federal appeals court ruled that CLOs are not subject to the Dodd-Frank risk-retention requirements. Prior to the ruling, CLO managers had to hold at least five percent of product value before selling, in effect retaining “skin in the game.” In September, Sen. Warren wrote to the SEC saying that pairing leveraged loans with complex CLO structures “creates significant risk to the financial system and the American economy.”

Swelling Consumer Debt

In 2019, consumer debt rose by $601 billion, the largest single-year increase since the financial crisis. 

Total Debt Balance for Households:

Source: FRBNY Consumer Credit Panel/Equifax

Consumer debt can be broken down into housing and non-housing debt (student loan debt, credit card debt, and auto loan debt). 

  • Housing Debt: The New York Fed’s Quarterly Report on Household Debt, released this month, showed mortgage delinquency rates continuing to decline and fewer homeowners underwater on their mortgages. Mortgage debt accounted for 62 percent of the rise of all consumer debt in Q4 2019. 

Non-bank origination of government guaranteed mortgage lending is an area of concern. The number of non-bank mortgage lenders such as Quicken Loans and Freedom Mortgage has risen exponentially since 2008. These lenders are not subject to the same liquidity standards as other banks, and their failure would be catastrophic to the financial system. 

  • Student Loan Debt: Student loan debt levels are the most concerning of all non-housing debt, with $1.6 trillion in student loan debt outstanding owed by 45.1 million borrowers. The average debt held by a recent graduate is over $37,000 — $20,000 more than it was a decade ago. The average monthly student loan payment has skyrocketed over 70 percent from $227 in 2005 to $393 in 2019. 
  • Auto Loan Debt: Auto-loan debt increased by $16 billion in Q42019, and Americans currently hold $1.2 trillion total of auto loan debt — double the amount of auto loan debt held a decade ago. Auto loans account for nearly 9.5 percent of all consumer debt in America, making it the third largest debt category. While the number of delinquent buyers remains low, in the case of an economic downturn, auto consumers are at risk of over-extending themselves. 
  • Credit Card Debt: Last quarter, credit card debt rose by $46 billion, an amount economists admitted was larger than expected. For the last three years, Americans have paid more than $100 billion (over $400 per American adult) in credit card interest annually. In comparison, Americans paid around $84.9 billion in credit card interest in 2016 (around $339.60 per American adult). 

Consumer debt tends to rise as the economy improves—consumers have more confidence, so they borrow more. But what goes up must come down, and the amount of debt is nearing unsustainable levels. 

Systemically Risky Debt

Debt helps the economy grow — mortgage loans enable families to buy homes. Companies grow by issuing bonds. During this period of low interest rates, taking on debt can be a wise financial decision. But the Great Recession made clear that sufficiently obscured or ignored weak credit quality can pose systemic risks to the broader and real economy.

After the last recession, regulators focused on the mortgage market. But now business debt markets are taking on riskier debt again. Unlike individual defaults on a mortgage, a firm defaulting almost invariably has ripple effects — job losses, missed paychecks for multiple families. We’re reminded by recent history that time shoring up the business debt market is a vital market self-correction of discipline before the Fed or Congress calls for another TARP.  

84 thoughts on “Amid Market Viral and Spiral”

  1. Useful information. Fortunate me I found your web site by chance, and I am
    surprised why this coincidence didn’t came about in advance!
    I bookmarked it. asmr 0mniartist

  2. After going over a number of the blog posts on your blog, I honestly
    appreciate your technique of blogging. I bookmarked it to
    my bookmark site list and will be checking back soon. Please check out my web site
    too and let me know how you feel. 0mniartist asmr

  3. Hi, I do think this is a great website. I stumbledupon it 😉 I am going to come back once
    again since i have book-marked it. Money and freedom is the best
    way to change, may you be rich and continue to guide others.

    My homepage :: love138

  4. An impressive share! I have just forwarded this
    onto a friend who has been conducting a little homework on this.
    And he in fact bought me breakfast because I stumbled upon it
    for him… lol. So let me reword this…. Thanks for the meal!!
    But yeah, thanx for spending the time to talk about this matter here on your blog.

    Stop by my website id test lpe88 (https://918kiss-m.com/)

  5. Hey There. I found your blog using msn. This is
    a very well written article. I will make sure to
    bookmark it and come back to read more of your useful
    information. Thanks for the post. I’ll certainly comeback.

    Feel free to surf to my page :: game slot ntc33
    (918kiss-m.com)

  6. Saya akan segera pegang rss Anda karena saya tidak
    bisa
    Sangat keren! Beberapa poin yang
    Wow! Saya sangat menggali template / tema dari blog
    ini. Sederhana, namun efektif. Seringkali
    sangat sulit untuk mendapatkan “keseimbangan sempurna” antara keramahan pengguna dan penampilan. Saya harus mengatakan Anda memiliki telah melakukan pekerjaan yang luar biasa dengan ini.

    Selain , blog memuat super cepat untuk saya di Opera .
    Blog Luar Biasa !

    My blog post; Download joker123 deposit pulsa

  7. My programmer is trying to persuade me to move to .net from PHP.

    I have always disliked the idea because of the expenses.
    But he’s tryiong none the less. I’ve been using WordPress on various websites for about a year and am concerned about
    switching to another platform. I have heard good
    things about blogengine.net. Is there a way I can import all my wordpress posts into it?

    Any kind of help would be greatly appreciated!

  8. Howdy! I realize this is somewhat off-topic however
    I needed to ask. Does operating a well-established website such as yours require a lot of work?
    I am completely new to running a blog but I do write in my journal on a daily basis.
    I’d like to start a blog so I can share my personal experience and views online.
    Please let me know if you have any kind of recommendations or tips for
    new aspiring blog owners. Appreciate it!

    My web blog – https://trumaroonnation.net

  9. I was curious if you ever considered changing the page layout of your site?
    Its very well written; I love what youve got to say.
    But maybe you could a little more in the way of content so people could connect with
    it better. Youve got an awful lot of text for only
    having 1 or 2 images. Maybe you could space it out better?

    Check out my page payfirstsolutions.com

  10. I do not even know the way I ended up right here, however I thought this submit was once good.

    I do not recognise who you’re however definitely you’re going to
    a famous blogger if you aren’t already 😉 Cheers!

    Feel free to surf to my site :: kebe.top

  11. Just want to say your article is as astounding. The
    clearness in your post is simply cool and i can assume you are an expert on this subject.

    Well with your permission allow me to grab your RSS feed to keep updated with forthcoming post.
    Thanks a million and please carry on the gratifying work.

    My site :: gamezombie.co.uk

  12. I used to be suggested this blog through my cousin. I’m no longer positive whether or not this submit is written through him as nobody else know
    such unique approximately my problem. You’re incredible!
    Thanks!

  13. It’s really a nice and useful piece of info. I’m satisfied that you simply shared this useful info with us.
    Please stay us informed like this. Thank you for sharing.

  14. Please let me know if you’re looking for a writer
    for your weblog. You have some really good posts and I believe I would be a good asset.

    If you ever want to take some of the load off, I’d love to write some material for
    your blog in exchange for a link back to mine. Please blast me an e-mail if interested.
    Cheers!

    Look at my web page – 39.100.90.4

  15. You could certainly see your enthusiasm in the article you write.

    The world hopes for more passionate writers such as you who are not afraid to
    mention how they believe. Always follow your heart.

  16. I’m really enjoying the design and layout of your blog. It’s a
    very easy on the eyes which makes it much more
    enjoyable for me to come here and visit more often. Did you hire out a
    designer to create your theme? Outstanding work!

  17. I do not even understand how I finished up here, however I assumed this put
    up was great. I don’t realize who you’re however certainly you’re going to a well-known blogger if you happen to are not already ;
    ) Cheers!

    Here is my blog post :: atomy123.cn

  18. Pretty section of content. I just stumbled upon your web site and in accession capital
    to assert that I acquire actually enjoyed account your blog posts.

    Anyway I’ll be subscribing to your augment and even I achievement you access consistently quickly.

    Here is my web-site – 39.104.22.11

  19. scoliosis
    Howdy just wanted to give you a quick heads up. The words in your post seem to be running off the screen in Safari.

    I’m not sure if this is a format issue or something to do with browser compatibility but I thought
    I’d post to let you know. The style and design look great though!
    Hope you get the problem fixed soon. Cheers scoliosis

  20. free dating sites
    Do you have a spam problem on this website; I also am a blogger,
    and I was wondering your situation; we have developed some nice methods and
    we are looking to trade techniques with others, please shoot me an email if interested.
    free dating sites

  21. Magnificent goods from you, man. I’ve keep in mind
    your stuff prior to and you’re simply too wonderful.
    I actually like what you have got right here, certainly
    like what you are stating and the way in which during which you
    say it. You’re making it entertaining and you continue to care
    for to stay it smart. I can’t wait to learn much more from you.
    That is really a wonderful site.

  22. Hey there! Someone in my Facebook group shared this website
    with us so I came to take a look. I’m definitely enjoying the information. I’m bookmarking and will be tweeting this to my followers!
    Superb blog and amazing design and style.

  23. Pingback: free russian dating agency

  24. Write more, thats all I have to say. Literally, it
    seems as though you relied on the video to make your point.
    You definitely know what youre talking about, why
    waste your intelligence on just posting videos to your
    weblog when you could be giving us something enlightening to read?

  25. I am really inspired with your writing abilities as neatly as with
    the layout in your weblog. Is that this a paid subject matter or did you customize it yourself?
    Either way keep up the excellent quality writing, it’s uncommon to look a great blog like this one nowadays..

  26. Thanks so much for giving me personally an update on this issue on your web site.
    Please realise that if a completely new post appears or in the event any variations occur on the current publication, I would be thinking about reading more and knowing how to make good utilization of those strategies you talk about.
    Thanks for your time and consideration of people by making your blog available.

    Also visit my web site: bbs.yunweishidai.com

  27. Very nice post. I simply stumbled upon your blog and wanted to say that I have really enjoyed surfing around your blog posts.
    In any case I’ll be subscribing to your rss feed and I hope you write again very soon!

    Take a look at my web blog mpc-install.com

  28. Greetings! I’ve been reading your website for a while now and
    finally got the bravery to go ahead and give you a shout out from Atascocita
    Texas! Just wanted to say keep up the great work!

    Check out my website – Max Brute

  29. We still can not quite believe I could end up being one of those reading the important guidelines found on your blog.
    My family and I are sincerely thankful on your
    generosity and for giving me the possibility to pursue my personal chosen profession path.
    Appreciate your sharing the important information I obtained from your web
    page.

    My blog post :: KetoBHB Plus Reviews

  30. I like what you guys are up also. Such smart work and reporting! Keep up the excellent works guys I?¦ve incorporated you guys to my blogroll. I think it’ll improve the value of my web site 🙂

Leave a Comment

Your email address will not be published. Required fields are marked *