Junk is hanging over us. Illustration: Aïda Amer/Axios
Both Moody's and S&P Global downgraded PG&E from investment grade to junk this week, meaning the California utility is likely in for some major upheaval, Axios' Courtenay Brown writes.
Why it matters: PG&E's problems are unique, but the company's recent trouble highlights a growing risk in the credit market for companies that technically have investment grade debt, but are teetering on the brink of junk status. A weakening economic and credit cycle could spark a slew of downgrades, with half of investment-grade debt in the lowest-rated rank.
The number of companies with debt just one level above junk has swelled 247% since the end of 2007, faster than the 190% increase for the overall credit market. But so far, only 7% of these companies has been downgraded, according to Fitch Ratings.
The bottom line: Corporations have ratcheted up their debt load to the tune of $9 trillion since the financial crisis, thanks to easy money and a long period of low interest rates. S&P Global analysts noted recently that the booming credit cycle is "in its later stages."
There is now more than $3 trillion of corporate debt outstanding rated BBB. That's greater than than the total amount of AAA-, AA- and A-rated credits combined.
Goldman Sachs Economic Research team notes:
Yes, but: The researchers note that they are not sold on a recession. "In our view recession risk remains fairly low, in the neighborhood of 15% over the next year."
Remember: Always Talk Your Book (ATYB). Goldman analysts predicted the S&P 500 would finish the year at 3000 in its 2019 outlook. That's a 500-point gain from where it finished 2018 and 404 points higher than Thursday's close.
The market shrugged off Fed Chairman Jerome Powell's remarks Thursday at the Economic Club of Washington, D.C. The message had been received. The Federal Reserve will be "patient" and is even ready to cut U.S. interest rates if the stock market does not resume its upward rise.
Be smart: It's hard to find another reason for the complete about-face the Fed has taken since Powell said during his press conference on Dec. 19 that the central bank would continue raising interest rates. Data points beyond stocks look great.
And Powell hasn't been alone in beating the drum for the Fed to feel the market:
Between the lines: Asset managers are struggling with slowing investment flows, market volatility that's got investors pulling their money, plus pressure from other low-cost index funds in the industry.
We've been here before: The last time BlackRock announced layoffs of this size was 2016 when it terminated about 400 workers. That same year Franklin Templeton announced layoffs, and State Street laid out a five-year "cost-cutting" effort.
The layoff trend in asset management is moving so fast Bloomberg even made a list.
The number of U.S. workers employed at older, established firms reached its highest level on record, according to the U.S. Census Bureau's recently released 2016 Business Dynamics Statistics, even though 2016 was the best year for U.S. business formation since the financial crisis.
Why it matters: A December NBER study suggests that "both the declining startup rate and the rising dominance of older firms can in large part be attributed to demographic factors... With population growth now at an 80-year low on the most recent numbers, it seems that the country’s demographic reckoning is beginning to make itself felt in the economy."
What they're saying: Analysts at the Economic Innovation Group note, “[f]ar from an unprecedented era of disruption and transformation, the current period is one in which the forces of both creation and destruction remain unusually subdued. Indeed, the post-recession period remains one of the least disruptive in modern economic history.”
The top story in Situational Awareness in Wednesday's newsletter was corrected to show Reuters reported VW is spearheading a $300 billion spend on EVs (not $300 million). That mistake was all me. My bad.