Even those who do not believe that US equities are in a bubble (or that moral
hazard troubles are rampant) must admit that debt issuance from low interest
rates are at colossal levels. The amount of debt issuance has broken a
new record four years in a row. The last two quarters are the largest quarters
ever.
This moonshot of global levels of indebtedness will be an economic headwind for decades to come particularly if and when interest rates rise. Maintaining a policy tool that encourages such massive indebtedness (public and private issuance) is imprudent long run policy. As mentioned above, it mortgages the future while attempting to immediately boast equity prices and economic activity. This trade-off has failed to play out as officials suspected; otherwise debt-to-GDP levels would have fallen.
It is the Fed’s zero interest rate policy foremost that has provided the opportunity for the debt issuance to occur in the first place. As the Volcker Rule launches on July 20th, market making and liquidity will soon deteriorate further; a troubling result of over-zealous regulators. In addition, a large portion of the debt issuance proceeds have gone into share buyback, further fueling the illusion of healthy EPS improvement.
“The government solution to a problem is usually as bad as the problem”.
– Milton Friedman
This moonshot of global levels of indebtedness will be an economic headwind for decades to come particularly if and when interest rates rise. Maintaining a policy tool that encourages such massive indebtedness (public and private issuance) is imprudent long run policy. As mentioned above, it mortgages the future while attempting to immediately boast equity prices and economic activity. This trade-off has failed to play out as officials suspected; otherwise debt-to-GDP levels would have fallen.
It is the Fed’s zero interest rate policy foremost that has provided the opportunity for the debt issuance to occur in the first place. As the Volcker Rule launches on July 20th, market making and liquidity will soon deteriorate further; a troubling result of over-zealous regulators. In addition, a large portion of the debt issuance proceeds have gone into share buyback, further fueling the illusion of healthy EPS improvement.
“The government solution to a problem is usually as bad as the problem”.
– Milton Friedman
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