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Crexit: Corporate Debt Set To Balloon

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Following the Brexit vote, jokes abounded of possible Departugal, Czechout, Italeave, Oustria, Byegium, and several other countries name-based puns.

Funny stuff, but the latest portmanteau is far from a laughing matter: read on for analysts’ fears of Crexit, the result of ballooning corporate debt and the risks it poses.

The current situation and how it could be managed

Corporate debt is the housing market crisis of its day.

The figure is projected to balloon over the next few years, due to various factors.

One of the most important of these is that Central Banks throughout the world are toying with zero or negative interest rates.

This provides cheap money to make the rounds, and the debt is piling up.

crexit 1

A report earlier this week has warned that this debt pileup has the potential to spark a new crisis from all that borrowed money circulating in the economy.

The figures are astronomical and growing all the time.

By the year 2020, several things will have occurred.

Britain’s socialist opposition leader will have proven his credentials or flunked like everyone predicted.

The Kyoto Protocols aimed at 2020 will have been achieved or failed.

Portugal will have lost or retained the European Championship.

And business debt will probably climb from the $51 trillion it is currently at to $75 trillion.

This is according to our friends at S&P Global Ratings, who tend to be right about this stuff.

They track the eponymously named 500 companies’ index which is a good barometer of the economy.

Of course, $51 trillion is already a huge amount.

But the thing about debt is it’s perfectly manageable as long as:

The quality of credit stays high

–    Interest rates remain low as they currently are (which is why the Fed raising was such a huge event)

–    Inflation remains low

–    Economic growth remains high so that investors don’t worry about not getting paid

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Assuming things don’t go so swimmingly

But should things not go exactly according to this plan, there is another scenario, from where we get our horribly unimaginative and lazy portmanteau, crexit.

Should interest rates rise, which they could, and economic conditions worsen, which they might, there could be a huge problem for corporate America when trying to manage its debt.

Interest rate rises will make it harder to borrow money.

Worsening economic conditions are a huge fear now that Britain is almost certain to leave the European Single market, in some way, shape or form.

A bad global economy, let alone a sad one, would scare investors into thinking they won’t get paid, and country’s credit ratings will be slashed, making it harder for them to borrow.

Mostly, bondholders would suffer because rolling bonds over would become increasingly difficult under increased inflation and an interest rate rise.

The economy worsening would hurt businesses’ ability to pay off the debt.

A combination of these two leads to all sorts of problems for all parties.

If it did occur, we could see a crexit.

A credit-exit.

This would be lenders withdrawing from credit markets due to fears of the economy and covering their costs.

If it occurred, it would lead to a drastic tightening of market conditions.

This has the potential to cause another financial meltdown, and the world simply cannot deal with that, economically, politically or socially.

Worst Case Scenario

In the report, S&P Global said that the nightmare scenario would be a series of high-risk, high-cost negative surprises that prove to be the spark for a new crisis of confidence.

Confidence in the world economy is already at an all-time low because of how long and profound the last recession was.

crexit 2

Add to that the slowing China economy and Britain’s decision to leave the European Union; you have salt in the wounds that now mean the world economy is at its most fragile.

Confidence is low, and it can’t afford to get any lower.

If events opposite to those listed in the bullet points, or any major economic events that no one can foresee happen, it will be destabilizing.

–    Investors will feel pushed to exit their risky positions where they fear that they are going to lose big money.

–    If swarm effect holds genuine and they all go in the same direction, this will see a collapse in credit growth.

–    And the last time that happened? 2008

What is inevitable and what is potential

Many, S&P included, believe that a ‘correction,’ industry speaks for a significant collapse and readjustment, to be almost inevitable.

They see it as inevitable at some point in the next decade, and the real million-dollar question is to what extent they will be right.

Not whether it will happen, but how much.

They worry that investors have been too hungry for yield and have ended up going on a frenzy of buying speculative, low-grade corporate debt.

China has been as guilty as the United States in this regard, the former having used the borrowing tool to spur growth in the face of a slowing economy.

Its growth is still astronomical compared to Western economies, but it is decreasing each year.

Remember in the housing crisis (see graph below) when it was found out that mortgage bonds were weak structurally and pyramids made up of speculative and non-existent deals made the whole thing come crashing down?

This is a little similar, except now its corporate debt rather than mortgages.

crexit 3

The blame for much of this lies at the feet of the world’s central banks.

Since the crisis, they have embarked on a policy of low-interest rates and cheap money as a spur to economic growth.

The problem with this is the notion that growth fueled by credit rather than innovation and investment is healthy is an entirely false one.

The global economy needs real growth, not one made out of printed bills.

Monetary policy by said central banks has increased the financial risk that the world faces, the opposite effect that it was meant to have.

After uncertainty about growth during the crisis, central banks wanted to give the economy a jolt to restore confidence and stability.

But it has done the opposite.

The problem is that corporate borrowing is shooting way ahead of global economic growth.

And who can blame them when credit is so cheap with interests rate set so low?

More debt? Don’t fret

Even in the face of this impending crisis with sky-high debt levels, central banks are too terrified to put the brakes on to their policy of low rates.

Interest rates are low from Tokyo to Texas, from London to Lagos, Moscow to Medellin (okay maybe not exactly in all those places but you get the picture).

crexit 4

The low-interest rates have caused a boom in not only corporate debt but government debt too.

$12 trillion of government bonds now carry negative yields.

That means investors aren’t getting anything back from buying government bonds.

Debt flow is predicted to grow by over $60 trillion by 2020.

–    Two-thirds of this are expected to be in refinancing (so just managing current debt).

–    The remaining one-third will be in a brand spanking new debt. Shiny, shimmering debt.

–    This will include bonds, loans, and any other financial instruments.

–    This projection has increased from that of under $60 trillion that was given by S&P some time ago.

Best case scenario

While the debt market is reaching its upper limits, S&P and others are hoping for an orderly drawdown.

A gradual scaling back of current policy of low-interest rates and cheap money for more sound future finances.

This is the best case scenario, but it will be difficult to become a reality.

Firstly, things like Brexit will unnerve world leaders.

The most important political events such as the high vote throw a spanner in the works and a change to the status quo of the last 40 years is bound to cause some paranoid visions of what its result will be.

Nervous leaders are prone to pulling back from giving cheap credit to higher-risk borrowers.

Debt is piling up in China’s somewhat opaque but robustly expanding corporate sector, and there is also growing debt in the United States’ leveraged finance sector.

The risk is in credit quality.

‘Highly leveraged’ is a term applied to around half of companies that are outside the financial sector.

This category is the lowest one available for risk, and about 5% of this category group have negative earnings or negative cash flows.

In 2016 so far, there have been 100 debt defaults.

This is the most for this period in the year since the financial crisis.

Worrying signs.

S&P and other firms are worried that investors who have tried to play a long game and bought bonds with long-term caveats are at risk.

They have done so to chase high yield, but the risk is that they will lose money and pull out of the market to play it safe.

Unfettered funding of debt has created conditions for elevated prices of financial assets.

Low-interest rates have added to this factor and increased the effect.

Investors are searching for yield, and financial assets are seeing augmented prices because of it.

Market volatility could increase over the next few years because of this.

Small secondary-market cash flow and liquidity will lead to credit spreads for even riskier securities and longer contracted assets being the most exposed.

China will be responsible for most credit flow growth.

The nation is predicted to add almost $30 trillion to global demand, while the US and Europe will add $14 and $9 trillion respectively.

 

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Las Vegas Sands Once Again Recognized as World Leader for Climate Change

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Las Vegas Sands Once Again Recognized as World Leader for Climate Change
Image via Shutterstock

Las Vegas Sands has again been recognized by CDP, the international nonprofit environmental disclosure platform, on the Climate Change A List. This is the company’s fifth year in a row to attain a leadership position for Climate Change, a distinction shared by only 2% of disclosing companies.

“The CDP provides a comprehensive framework that continues to inspire us to become leaders in our industry and provide guidance for strategic direction,” Katarina Tesarova, senior vice president of global sustainability at Las Vegas Sands, said. “Among the thousands of companies that were scored this year, Sands is one of a very small number from around the world to make the A List. We’re proud to be recognized, and we will continue to work towards additional reduction of our environmental impact.”

Through Sands ECO360, the company’s award-winning global sustainability program, Sands has reached several environmental milestones, all contributing to its placement on the Climate A List. The iconic ArtScience Museum at Marina Bay Sands in Singapore is the first Asia-Pacific region museum to achieve LEED (Leadership in Energy and Environmental Design) certification, and The Parisian Macao achieved LEED Silver certification for newly constructed buildings – the first building in Macao to receive this distinction. Additionally, the implementation of 38 energy-efficient ECOTracker projects are expected save more than 48 million kilowatt hours of electricity every year, through LED lighting upgrades, energy savings campaigns focused on consuming less electricity and more.

Sands has participated in the CDP environmental disclosure platform since 2012, starting first with reporting on climate change initiatives. Achievement of the Climate Change A List highlights the company’s work towards cutting emissions, mitigating climate risks and building integrated resorts responsibly.

The company has also retained its leadership in corporate sustainability with its most recent recognitions on the Dow Jones Sustainability Indices (DJSI) and America’s Best Employers by Forbes.

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Dow Jones Industrial Average Breaks 29,000 For The First Time in History

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Screenshot of Dow Jones Industrial chart taken January 15, 2020.
By ELAINE KURTENBACH, AP Business Writer

Slight gains send Dow Jones Industrial Average above 29,000!

The Dow Jones Industrial Average closed above 29,000 points for the first time and the S&P 500 index hit its second record high in three days Wednesday.

The milestones came on a day when the market traded in a narrow range as investors weighed the latest batch of corporate earnings reports and the widely anticipated signing of an initial trade deal between the U.S. and China.

President Donald Trump and China’s chief negotiator, Liu He, signed the “Phase 1″ deal before a group of corporate executives and reporters at the White House. The pact eases some sanctions on China. In return, Beijing has agreed to step up its purchases of U.S. farm products and other goods.

“This was telegraphed well enough that the market is kind of looking through it and toward the next phase and what that means,” said Keith Buchanan, portfolio manager at Globalt Investments.

Health care stocks accounted for much of the market’s gains. Utilities and makers of household goods also rose. Those gains outweighed losses in financial stocks, companies that rely on consumer spending and the energy sector.

The S&P 500 index rose 6.14 points, or 0.2%, to 3,289.29. The index also climbed to an all-time high on Monday.

The Dow gained 90.55 points, or 0.3%, to 29,030.22. The Nasdaq composite added 7.37 points, or 0.1%, to 9,258.70.

Smaller-company stocks fared better than the rest of the market. The Russell 2000 picked up 6.66 points, or 0-4%, to 1,682.40.

The benchmark S&P 500 index is on track for its second straight weekly gain.

Bond prices rose. The yield on the 10-year Treasury note fell to 1.78% from 1.81% late Tuesday.

While limited in its scope, investors have welcomed the U.S.-China deal in hopes that it will prevent further escalation in the 18-month long trade conflict that has slowed global growth, hurt American manufacturers and weighed on the Chinese economy. The world’s two largest economies will now have to deal with more contentious trade issues as they move ahead with negotiations. And punitive tariffs will remain on about $360 billion in Chinese goods as talks continue.

With the “Phase 1” agreement now a done deal, investors have more reason to focus on the rollout of corporate earnings reports over the next few weeks. Earnings have been flat to down for the last three quarters, and if the fourth quarter meets expectations, it should be around the same.

However, analysts are projecting 2020 corporate earnings growth to jump around 9.5%, which is why traders will be listening this earnings reporting season for any clues management teams give about their business prospects in coming months.

“We’re expecting a reacceleration in the back end of the year, so any (company) guidance that brings any type of skepticism to that could threaten the recent rally we’ve had and the gains that we’ve accrued in the past few months,” Buchanan said.

Health care stocks powered much of the market’s gains Wednesday. Several health insurers climbed as investors cheered a solid fourth-quarter earnings report from UnitedHealth Group.

The nation’s largest health insurer, which covers more than 49 million people, said its revenue rose 4% on a mix of insurance premiums and growth from urgent care and surgery centers. Its stock rose 2.8%. Other health insurers also moved higher. Anthem gained 1.6%, Cigna added 1.5% and Humana climbed 1.9%.

Technology companies also rose. The sector is reliant on China for sales and supply chains and benefits from better trade relations. Microsoft gained 0.7% and Advanced Micro Devices gained 0.8%.

Utilities and consumer staples sector stocks also notched gains. Edison International climbed 2.5% and PepsiCo rose 1.7%.

Financial stocks fell the most. Bank of America slid 1.8% after reporting weaker profits due to the rapid decline of interest rates in late 2019.

Energy stocks also fell along with the price of crude oil. Valero Energy dropped 3.3%.

Homebuilders marched broadly higher on news that U.S. home loan applications surged 30.2% last week from a week earlier. The pickup in mortgage applications reflects heightened demand for homes and suggests many buyers are eager to purchase a home now, rather than waiting for the traditional late-February start of the spring homebuying season. Hovnanian Enterprises jumped 6.4%.

Target slumped 6.6% after a disappointing holiday shopping season prompted the retailer to cut its forecast for a key sales measure in the fourth quarter. The company said weak sales of electronics, toys and home goods crimped sales growth to just 1.4% in November and December.

Benchmark crude oil fell 42 cents to settle at $57.81 a barrel. Brent crude oil, the international standard, dropped 49 cents to close at $64 a barrel.

Wholesale gasoline fell 1 cent to $1.64 per gallon. Heating oil declined 3 cents to $1.88 per gallon. Natural gas fell 7 cents to $2.12 per 1,000 cubic feet.

Gold rose $9.70 to $1,552.10 per ounce, silver rose 25 cents to $17.92 per ounce and copper fell 1 cent to $2.87 per pound.

The dollar fell to 109.91 Japanese yen from 110.00 yen on Tuesday. The euro strengthened to $1.1150 from $1.1128.

Markets in Europe closed mostly lower.

AP Business Writer Damian J. Troise contributed.

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Uber and Hyundai Are Planning to Offer Flying Taxi Rides by 2023

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Hyundai/Uber Flying Taxi Source: Hyundai
By Cat Ellis

At CES 2020, Uber and Hyundai showed off a full-size mock-up of a flying taxi that both companies hope will be ferrying you above congested city streets by 2023.

The electric plane, called Uberdai, will carry a pilot and three passengers up to 60 miles, at speeds of up to 180mph, slashing journey times and helping get cars off the road. Eventually the craft will be automated, but for now the two companies are focusing on manned craft.

The flying taxi market is starting to get pretty lively. Last year, Boeing began test flights to test the safety of Boeing. Next, an electric aircraft with passenger pods designed to travel up to 50 miles, and Bell Helicopter unveiled the Bell Nexus, which the company hopes will “redefine air travel”.

The difference with Hyundai’s plane is its partnership with Uber, which is a name synonymous with ride-sharing throughout much of the world, and already has the infrastructure in place to offer flights as an option alongside trips by car, bike, scooter, helicopter and even submarine.

Ready for lift-off?

Uber has been aiming for the skies for several years now, teaming up with various aerospace companies to build a fleet of mini aircraft. At the Uber Elevate Summit in June 2019, it revealed a concept created in collaboration with Jaunt Air Mobility – a business that’s aiming to create a fully autonomous aircraft by the end of 2029.

This design was a cross between a helicopter and a plane, with a rotor to get it off the ground, and wings for gliding once airborne to conserve power.

“It’s called the compound aircraft, and what it’s doing is really trying to get the best of both worlds of hover and high-speed efficient flight,” Uber’s head of engineering Mark Moore said at the event.

Uber intends to launch its first swarm of flying cars in the US and Australia in 2023, with schemes planned for Dallas, Las Vegas and Melbourne. We’ll keep you updated as we learn more over the coming months. 

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