The Only Question That Matters: “Is The Credit Cycle About To Crack” – Two Banks Respond…(Credit Breaks…Trucking Stops!)

Thursday, April 19, 2018
By Paul Martin

by Tyler Durden
Thu, 04/19/2018

When trying to determine the fate of equities over the next few months (or years) and whether – as some speculated recently – the bull market has already peaked, investors should divert their attention from the stock market and focus on a different asset class: credit.

Why? Because as the sharp swoon in Goldman’s stock this week demonstrated, when it comes to the marginal buyer of stocks, it is all about corporate buybacks, or more importantly, their absence. Recall that last month JPM forecast that thanks to low rates and Trump’s tax reform, in 2018 there will be over $800 billion in corporate buybacks this year, a truly staggering, record number.

But for that to happen, one thing has to be present: a vibrant credit cycle which allows companies to issue hundreds of billions in net IG and junk debt. After all, the bulk of buybacks are funded with new debt issuance (see the latest IBM results), and if the credit cycle cracks – meaning if rates spike enough to cause a buyside panic and halt new issuance – it’s all over for both buybacks, and the bull market in stocks.

To answer the question we present two bank reports, which while similar reach somewhat different conclusions.

The first is from Morgan Stanley, and explains why the bank “thinks a turn in the credit cycle is near.” The argument can be summarized in the three key points (from credit strategist, Adam Richmond):

The Rest…HERE

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