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Louis Gave On Corporate Debt And The Next Liquidity Crisis
This has been a good year for the stock market so far, at least in the U.S., yet many investors are wondering when the other shoe will drop. We spoke with Louis-Vincent Gave, founding partner and CEO at Gavekal Research, about the explosion in near junk corporate debt and why this is a problem during the next economic downturn.
For audio, see Louis Gave: Bond Market Liquidity Is the New Leverage
Bond Market Liquidity Is a Problem
The situation that’s developed is concerning. With the growth of exchange-traded funds (ETFs) in the corporate bond space, we have players that are guaranteeing daily liquidity in an asset class that historically doesn’t always guarantee liquidity.
Today, if investors need liquidity in a hurry, they’re essentially on their own, Gave stated. Meaning we might notice a dislocation in corporate bonds, keeping in mind that we’ve seen record issuance.
Normally, corporate debt relative to GDP makes highs at the bottom of the cycle when GDP is shrinking and everybody’s tapping their credit lines. Corporate debt relative to GDP is extremely high, and interestingly, Gave noted, the amount of debt that’s grown the fastest is just one notch above junk.
During the next recession, the number of companies that will be downgraded will lead to forced selling by institutions. This is one of Gave’s greatest concerns today.
Source: Gluskin Sheff
Buyer of Last Resort
We’ve had a semi-crisis in emerging markets this year and U.S. bond yields have come down, which normally provides some cushion to the system. This is the first time in Gave’s career where U.S. bond yields have gone up while emerging markets were under pressure.
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Gavekal On The Coming Clash Of Empires: Russia’s Role As A Global Game-Changer
Gavekal On The Coming Clash Of Empires: Russia’s Role As A Global Game-Changer
Carthago Est Delenda
“Carthage must be destroyed”. Cato the elder would conclude his speeches in the Roman Senate with the admonition that salt should be spread on the ruins of Rome’s rival. Listening to the US media over these summer holidays from Grand Lake, Oklahoma, it is hard to escape the conclusion that most of the American media, and US congress, feels the same way about Russia. Which is odd given that the Cold War supposedly ended almost 30 years ago.
But then again, a quick study of history shows that clashes between land and sea-based empires have been a fairly steady constant of Western civilization. Think of Athens versus Sparta, Greece versus Persia, Rome versus Carthage, England versus Napoleon, and more recently the US versus Germany and Japan (when World War II saw the US transform itself from a land-based empire to a sea-based empire in order to defeat Germany and Japan), and of course the more recent contest between the US and the Soviet Union.
The maritime advantage
With this in mind, consider a mental map of the productive land masses in the world today. Very roughly put, the world currently has three important zones of production, with each accounting for about a third of world GDP.
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