Uncertainty and debt

Mixing uncertainty with debt. Rarely a healthy recipe. The festive season is behind us, and so are the rich and not so healthy meals consumed during the holidays. Back to the gym!

Trump, Le Pen, Brexit, Italy, the US Federal Reserve, China, Russia, etc. What are they going to do? What will happen? Quick answer: who knows? Experts, markets, and survey companies have, for the most part, been proven wrong.

We can agree on one thing. There is plenty of uncertainty out there and it is bound to increase with time.  These are exciting times for political pundits and those voters who rejected the status quo. But for businesses?

If Trump has his way, as he seems to always get, the US will enter into an expansion plan. So much so that the Fed is now considering several rate increases in 2017.

But how much stimulus can you get through with debt burdens where they are? So says Bob Michele, JPMorgan Asset Management’s global head of fixed income.

Over the years, the debt addiction brought about by low interest rates dragged down credit ratings.

Question: how many companies enjoy a AAA S&P in the US?

  1. 2
  2. 8
  3. 15
  4. None of the above

Hint: In 1992, there were 98 US companies enjoying the highest rating.

Today, only Microsoft and Johnson & Johnson maintain the top rating. Yes, only 2 US companies! ExxonMobil (AA+), GE (AA+) IBM (AA-) have all been downgraded.

The issuance of Treasury debt to fund infrastructure projects will have the negative effect of crowding out corporate issuance. When companies will issue debt, it will be at higher rates. Will companies be able to afford this?

Uncertainty causes recessions because it makes consumers, employers and investors hesitate before spending money. Couple this with a peak level of corporate debt and you have the ingredients for a very unhealthy recipe.

2017 may bring around a bigger package of unhealthy meals. Granted these won’t have all the calories we want to get rid of. But they may cause just as much upset stomach.


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