Trampoline Cliff Diving

We start this week's commentary with some rather depressing news from Reuters:

The ratio of downgrades to upgrades in the credit ratings of leveraged loans has spiked to a record level, five times above that hit during the last global financial crisis, reflecting the unprecedented stress in risky assets due to the coronavirus pandemic. Leveraged loans, which are loans taken out by companies that have very high levels of debt, usually with non-investment grade credit ratings--tend to be used by private equity firms as a way to fund acquisitions of such companies. The U.S. leveraged lending market has grown to more than $2 trillion, up 80% since the early 2010s, according to credit rating agency Moody's Investors Service.

Add in the $1.2 trillion junk bond market and the $3.2 trillion in BBB debt, which is just barely above the junk category, and you end up with nearly six and a half-trillion dollars' worth of corporate debt that is primed for varying degrees of default. The catalyst for this default is the worst economy since the Great Depression.

Is it any wonder why the Fed doesn't allow even a small correction to occur in the stock market or a slight decline in GDP any longer? But perhaps it's about time that it did. The valuation of equities is now back to an all-time high of 150% of GDP. And incredibly, just three stocks (AAPL, AMZN, and MSFT) are valued at $4.4 trillion. This means Wall Street has deemed it ok that just three companies have the same worth as 22% of the entire U.S. output per year. Of course, this makes Mr. Powell's cronies, along with the top 10% of households—who own 88% of stocks—most happy for sure.

The consumption-driven U.S. economy is under attack from many angles. There are still 29 million people collecting some form of unemployment insurance. This includes the over 9 million "off balance sheet" individuals covered under the Pandemic Unemployment Assistance program that the MSFM and the White House are fond to ignore.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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