Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

Maybe we'll all be in nursing homes by the time this credit cycle turns.

Cracks are certainly starting to form. More companies are skipping bond payments. Investors are occasionally being more discerning with riskier borrowers versus safer ones. Consumers are failing to pay credit card bills a bit more frequently.

But is this what the credit-cycle downturn looks like?

Monsters Under the Bed
Analysts are looking for signs that the credit cycle is ending, but are struggling to find them
Source: Federal Reserve

Investors are certainly mining this week's bank earnings to get a sense of how far along we are in the cycle. At Citigroup, it's hard to find signs of a turn.

Same thing at Wells Fargo.

Oh, Wells
Wells Fargo charge-offs ticked up one basis point sequentially in the second quarter. Run for the hills!
Source: Company presentation

What about JPMorgan? Well, maybe this is what the start of a rapid deterioration looks like:

JPMorgan

The tea leaves don't look overwhelmingly alarming just yet, but people are obviously still worried. The second question posed to JPMorgan's executives on Thursday's earnings conference call had to do with deteriorating consumer credit. Note how equity investors earlier this year ran for the hills at the first signs of worsening credit quality from Synchrony Financial and Santander Consumer.

But if this is the beginning of the end, it may be the slowest-moving downturn in history, largely thanks to the trillions of dollars that central banks worldwide are pumping into the financial system. 


Meanwhile, banks are still reducing leverage on their books from the last credit crisis, which scared enough investors into acting somewhat more prudently with their money. And while companies are still selling bonds to pay off their stock investors rather than invest in businesses, they can still borrow inexpensively, so everything is fine for now. Or something.

While the credit quality of some borrowers certainly appears to be worsening, the deterioration is so slow as to render it almost hard to spot. And the trouble spots are often found among particular lenders and in specific industries. For example, while the U.S. default rate is picking up, the rise is still largely due to distress among energy and other commodity-related companies, not a broad-based failure among corporate America.

Another League
One-year corporate default rate forecasts by industry
Source: Moody's

And while some high-end real estate markets seem to be struggling, there are signs of strength elsewhere in property markets.

Still, analysts are scrambling into every possible corner of credit markets to spot canaries in the credit coal mines. Is it subprime auto loans, as Jim Chanos has talked about? Is it the Bank of the Ozarks, which Carson Block has warned about? Maybe solar flares will finally turn the credit cycle!

Many investors certainly seem worried that this is the beginning of the end. After all, some of the brave few who warned of the last crisis have become stars, literally. Or perhaps they're just secretly wishing that those cracks would break open, ending the sheer drudgery of a post-quantitative easing world. 

Looking Ahead
Global speculative-grade default rates for issuers with bonds and loans
Source: Moody's

Certainly a bigger global event could upset the apple cart and cause a systemic shock that overwhelms central bankers' best efforts to tamp down all risk. But it's getting harder and harder to read the credit-cycle tea leaves.

This cycle will undoubtedly certainly likely maybe probably possibly end in a terrible way. Just make sure you're not too distracted with pinochle at the nursing home when armageddon comes.

-- Rani Molla assisted with graphics 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net