Hey Dario
We're in the phase of the credit cycle where companies "get hacked" or "have system outages". At least in the CMBS arena we're already seeing massive write downs as we slam into the 2024/2025 maturity wall. When do you think the likes of Nvidia/Microsoft or SB Northstar/Norinchukin will blow up? I'm assuming the corporates are laying off now to stretch out whatever cash flow they have till rates come down. What if rates come down substantially? Can they issue more bonds and kick the can down the road 5 years?
This is a very good and complex question sir. Technically speaking if US and/or Europe decide to follow the playbook Japan has been now for more than 30 years then the answer to your question is we will never see failures since the whole economic and financial system will be effectively zombified with companies technically insolvent but still able to operate because there is way more liquidity in the system than places to deploy it (and as a matter of fact this is why trillions of JPY flew oversea via carry trades).
Practically speaking, Japan already showed everyone how such a policy and most of all not allowing companies to default hence cleansing the system, kicking the can down the road forever simply chokes not only the economic development of a country but also the social one (massive collapse in birthrate and population is one of the consequences of future generations having a significantly lower purchasing power than those that preceded them). This is something China understood very well this is why they already put aside the QE aberration for good even if the Western world still does not understand they did. I shared many details about this in the below articles
- 25th July:Â CHINA HAS BEEN THE FIRST ONE TO ABANDON THE QE ABERRATION, WHO IS GOING TO BE NEXT?
- 2nd September: THE TWO KEY PRINCIPLES UPON WHICH CHINA IS REBOOTING ITS ECONOMY (AND THAT THE WEST DOESN’T UNDERSTAND)
- 25th September: A BIG BANK IS ON LIFE SUPPORT, CHINA KNOWS IT AND IS PREPARING TO WITHSTAND THE SHOCK – IS THIS BULLISH?
Hey thanks for the reply
I think there are some different circumstances between Japan and China that need to be considered here.
As Japan crashed and burned, it was about to experience a long period of strong yen, then deflationary pressures coming out of China, and finally strong consumption out of China. Because of that they were able to afford an acceptable lifestyle although there were still societal reverberations.
They also were able to develop enough of a social safety net that prevented a complete collapsing of the bottom end of income/wealth unlike the US. Although I do acknowledge that it's largely financed by debt, which luckily could be used as collateral without too much of a haircut from what I've heard.
I'm not sure China has the same set up ahead of them. I'm a little worried for them. I always thought they'd be able to avoid what happened to Japan.. not sure what happened there
