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This has been a good year for the stock market so far, at least in the U.S., yet many investors are wondering when the other shoe will drop. We spoke with Louis-Vincent Gave, founding partner and CEO at Gavekal Research, about the explosion in near junk corporate debt and why this is a problem during the next economic downturn.
The situation that’s developed is concerning. With the growth of exchange-traded funds (ETFs) in the corporate bond space, we have players that are guaranteeing daily liquidity in an asset class that historically doesn’t always guarantee liquidity.
Today - Investors - Liquidity - Hurry - Gave
Today, if investors need liquidity in a hurry, they’re essentially on their own, Gave stated. Meaning we might notice a dislocation in corporate bonds, keeping in mind that we’ve seen record issuance.
Normally, corporate debt relative to GDP makes highs at the bottom of the cycle when GDP is shrinking and everybody’s tapping their credit lines. Corporate debt relative to GDP is extremely high, and interestingly, Gave noted, the amount of debt that’s grown the fastest is just one notch above junk.
Recession - Number - Companies
During the next recession, the number of companies that will be downgraded will lead...
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