Monday, December 14, 2020

"A Growing Insolvency Crisis"

As I suggested in this morning's note, markets these days are moved by a most myopic force. 

By definition, that suggests that they may not be properly discounting longer-term reality.

And while, as we've stressed herein, there are clear opportunities to exploit in this world of top-down market manipulation, there are huge risks that prudent, thoughtful investors simply must hedge -- as we've been preaching since well before the pandemic hit...

A brief must-read Axios article titled A Growing Insolvency Crisis echoes what we've been warning.

Here's a chunk (I highly recommend the entire article):

"Companies around the world are increasingly at risk of failure, and the size of the problem is growing."

Driving the news: That's the message being delivered by two of the world's most respected monetary authorities — former European Central Bank president Mario Draghi and former Reserve Bank of India governor Raghuram Rajan — and a flurry of other top economists.

What's happening: "There is a growing corporate solvency crisis in most of the world, as balance sheets are hit hard by losses and the resulting need to pile up debt," co-chairs Draghi and Rajan, along with a group of economists, academics and central bankers that includes former chair of the Council of Economic Advisers Jason Furman and People's Bank of China governor Yi Gang, wrote in a report for the Group of 30 (G30).
"In addition, many companies entered the coronavirus recession with unusually high levels of leverage."
Between the lines: Further, the actions taken by central banks and governments in response to the coronavirus pandemic are masking the true state of the economy — a disguise that cannot last forever."

What we're hearing: While central banks could continue to pump money through the financial system for a long time, businesses can't survive on liquidity alone, Draghi told Axios during a meeting with reporters Friday.

"You can do a certain amount of what’s called evergreening but after a while the corporation will remain unviable no matter how big is the liquidity support."
"At this point in time the next issue we’ve got to be worried about is a surge in nonperforming loans all over the banking system in most parts of the world."

                                                                                     HT: Danielle Dimartino Booth 

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