Citi's credit strategy team warns, for non-financial corporations - fundamentals have turned. Low interest rates hae helped keep debt service burdens low but, as they suggest, releveraging tends to sneak up on you. Leverage is as high as its ever been outside recession. This may not be a problem today, or tomorrow, but the leverage clock is ticking... and credit markets have no room for downside surprises (and, as we have vociferously explains, if credit spreads rise as the credit cycle 'cycles' then the underpinning for the entire buyback/dividend driven 'fudge' for stock valuations is removed)... and risks seem far higher in the US (than Europe) going forward.
The leverage clock is ticking...
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But releveraging tends to sneak up on you...
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Leverage is as high as Citi has seen outside of recession... and credit is not priced for any risk...
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Any growth slowdown and leverage is in trouble...
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Which leaves the US a lot more at risk than Europe...
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We have seen this "credit cycle end, equities ramp" before - in 2007 - where leverage (both firm-wise (debt/EBITDA) and instrument-wise (CDOs)) provided the extra oomph to send stocks higher on the back of credit fueled extrapolation of earnings trends.
(charts: Barclays)
In the end we know this is unsustainable - the question is when (in 2007 it lasted 10 months or so...).
Of course, just as in 2007, things change very quickly once collateral chains start to shrink.
Perhaps this is why Carl iCahn called the top - because he knows the ability to re-leverage (his bread and butter trade) is over...