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Known Unknowns

Paul Tudor Jones was out making media rounds in connection to the recent market turmoil, saying that higher interest rates will cause the next debt crisis, but actually stopping short of predicting a crash. It’s the sort of thing you say to spook investors into reassessing risk when the prevailing sentiment is bearish. The truth is, excessive borrowing has led to unprecedented levels of corporate bond issuances (over $1 trillion every year since 2010 according to the Financial Times) and GE’s ongoing credit trouble might be the beginning of something systemic. Almost half of the investment grade bond market is now practically junk. That’s right, most of the M&A deals you’ve been hearing about on TV have been financed with the kind of debt that leaves very little room for error. AT&T’s debt load is now $190 billion (after buying Time Warner and DirecTV); Bayer’s is $63 billion (after paying for Monsanto), but both companies got to keep their investment-grade ratings despite questions about the sustainability of such debt loads.

Ironically, Jones also believes the Trump corporate tax cuts will be the catalyst for the next crisis because it accelerated growth and forced the Federal Reserve to raise rates. This put a lot of companies that are leveraged in a precarious situation. A wise man once said to think the worst because the worst will happen.



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