In 2008 there were very few people predicting recession, including Thomas Piketty, Mohamed El-Erian, Robert Reich, Paul Krugman, et. al. However, the kids of the New York Shock Exchange predicted the Great Recession and the next one. Their prognostications were chronicled Ralph Ralph Baker’s Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead. The book has been ignored by CNBC, Bloomberg, CNN and the corporate media. The coronavirus has brought global economies to a standstill. Miraculously Mohamed El-Erian, Chief Economist at Allianz, is now warning of a major economic slow down:
El-Erian: We are looking at a major economic slowdown. That’s going to increase credit risk. That’s going to increase downgrades. We will have downgraded falling angels coming into high yield.
Steve Liemsman (CNBC): AAA- is the lowest rung of investment grade. When you say an overhang you mean there is a ton of stuff that if things change they breach the barrier and become junk.
The size of the high yield market, it’s ability to absorb what’s coming down in the short term is limit. That disrupts that market, which then disrupts primary issuance. If you are an airline … if you are an energy company and you’re looking to refinance your debt it is going to be more difficult.
An economic slowdown will sharply reduce revenue and cash flow for several companies. However, their debt still needs to be repaid. Less cash flow with the same of amount of debt is hurt their credit quality, leading to ratings downgrades. This will amplify their borrowing cost, further crimping cash flow and liquidity. It will likely lead to major debt defaults, layoffs, etc.
Borrowing costs for companies currently considered investment grade will also rise. This will hurt their cash flow in addition to an economic slow down. This cascading of credit quality amid an economic slowdown will be devastating for the economy, just like Shock Exchange predicted.
