BofA: This Is Our Biggest Concern For The Remainder Of The Year

In a time of what to most, if not the market - yet - appears to be a forming perfect storm of trade wars, quantitative tightening, record global debt, a "terrible trio" of rising rates, oil price, and a surging dollar, Bank of America's European credit strategist Barnaby Martin has laid out what he believes is his biggest concern for the remainder of the year – and the downside risk scenario: an escalation in trade tensions between the US and Europe.

As increasingly more economists have pointed out in recent days, President Trump is only likely to back down on trade skirmishes once visible signs in the US emerge of either economic, market and/or political pain. And one look at the S&P 500, which is just shy of 2,800 and all time highs, these signs have been lacking.

But, as Martin notes,  if the US/Europe tit-for-tat trade dispute progresses to autos, or even a broader range of goods, then it is likely to be growth-sapping for the Eurozone.

Our economics team highlight that these scenarios could lower Eurozone growth by between 0.3% and 0.7% (depending on the range of US tariffs and the response of the currency). Yet Eurozone growth next year is forecast to be just 1.7%.

In other words, US-EU trade wars could crimp Eurozone growth to the extent that the economy would only be growing marginally above its long-term trend rate of growth (~1%). This would imply slower progress in reducing economic slack, keeping inflation subdued.

But as Martin warned two weeks ago when he explained why, in his view, Europe simply can not have any more recessions - and thus QE can not end - for the simple reason that some €800BN in BBB rated bonds are in danger of becoming fallen angels, resulting in a corporate bond crisis...

... a slowing of inflation momentum in Europe would risk the market pivoting to worrying about debt levels again, i.e. realizing just how massively mispriced everything is with QE over.

To Martin, "this would be the “Quantitative Failure” narrative."

Meanwhile, as the IIF updated just yesterday, there are still many market fragilities when it comes to debt levels after years of loose monetary policy (or rather, as Bloomberg again explained today, the record debt is there because of central bank policies) . The next chart from Martin shows total non-financial sector debt by country, split by government, corporate and household debt.

Here Martin notes that that plenty of countries already have total non-financial debt in excess of 250% of GDP, and in particular a number of European countries. And the fragilities are across many parts of the economy. For instance, note the high numbers for:

  • Household debt in Denmark, the Netherlands and Switzerland;
  • Corporate debt in Sweden, Ireland, Spain, Netherlands and Belgium; and
  • Government debt in Japan and Italy

Moreover, the BofA strategist adds that from a flow rather than a stock point of view, a number of countries have seen a rapid rise in their debt/GDP levels during the last decade, especially those where leverage was low after the Global Financial Crisis. Note, for instance, the jump in:

  • Household debt (Chart 14) in Sweden, Canada and Norway, commensurate with property prices having risen dramatically here; and
  • Corporate debt (Chart 15) in China, Switzerland, France (and Belgium – although the number is exacerbated by the tax environment).

BofA won't be the only one concerned about the level - and repricing - of corporate debt. As we reported last month, one man's crisis is another man's opportunity, and it is none other than distressed investing legend Howard Marks and his Oaktree, that is already eagerly looking forward to what it described as a "flood of troubled credits topping $1 trillion as rising interest rates overwhelm low-quality loans and bonds."

Speaking at the Bernstein Strategic Decisions Conference, Oaktree Capital's Chief Executive Jay Wintrob said that when the cycle turns it will be faster and larger than ever as "fallen angels" proliferate, and added ominously that "there will be a spark that lights that fire."

It increasingly appears that Trump's global trade wars could be just the spark that lights that particular conflagration.


Looney Wed, 07/11/2018 - 16:48 Permalink


Croatia just fucked up England!!

Fuck the England team! Fuck Theresa May! Fuck BritBob!!!

Now… I can’t wait for Bill Clinton to chime in and claim credit for bombing the shit out of Yugoslavia, splitting it into 8 mutually hostile countries, and thus helping Croatia getting into the World Cup Final.  ;-)

Looney (fuck the Clintons, too!)

Iskiab Wed, 07/11/2018 - 17:12 Permalink

Don’t agree with some of the economist’s opinions.  How can the bond market be mispriced?

He’s thinking the price of money should be higher due to the risk of default.  I say if governments  issue too much money with QE, then why should the price of money be high?  If lenders are over leveraged and took on too much risk that’s their problem.

There’s no pricing problem, the price and risk make sense based on the value of what was provided.  With low rates after adding so much to the supply they should expect the defaults.

the Dood Wed, 07/11/2018 - 17:38 Permalink

We already know Europe bends to terror attacks from Muslims, they'll break easily over the trade warz too! Just give up already, bunch of panzy asses

tunetopper Wed, 07/11/2018 - 18:03 Permalink

So tired of the simplistic narrative that we need inflation- ie that it is good to devalue our currency against the value of things-especially consumables.  And the opposite- we should detest deflation- ie. the value of our currency should rise above the value of things- especially durables and real estate.


What these type articles fail to realize is that we should all wish for a currency that is tethered to real outcomes which are positive for society and for family formation, as well as for freedom.  If we do that then the investment categories of choice will be self-evident.  We should ALWAYS regulate our institutions- to make certain they are not gaining unfair advantage of the peoples interests- life, liberty, and the pursuit of happiness.

shizzledizzle Wed, 07/11/2018 - 18:11 Permalink

I think Turkey is what's going to blow this whole thing up. Italian banks are exposed to Turkish bonds. It's clear Erdogan is gonna take Turkey to the shithouse and it appears he is going to do it at a brisk pace.