Comment by ajross
9 hours ago
My slightly informed cynical opinion is that if a consensus existed for what this meant for the general economy, plenty of experts would be telling you. So, we don't know.
Feedback effects ("ripple effect" in your usage) are a genuine risk of economic systems, but by their nature they aren't predictable. You get the non-linear feedback we're all terrified of (a "crash") when some buffer or another runs dry: some notable demographic needs money, normally gets it from place X (for example: selling stock, repackaging and selling mortgage securities, raising a series B round, issuing corporate bonds, etc...) and suddenly X doesn't produce the same returns. So they need to do another one of those things, which drives that price down, which causes the demographics that depend on that resource to run dry, etc...
This is a metric for just one buffer: the amount of cash available to issuers of high interest bonds. Is that the tipping point? We don't know, and won't until it tips.
Great comment :)
I used to be pretty into junk bonds during my MBA (I don't do this at all professionally, so YMMV with my commentary here), and I think, as usual, a lot of context would help with understanding what this could mean, which ajross described. In the most simple terms, as other have also mentioned, it's basically non-investment grade companies (and there are a lot of em - you'd be surprised at the names on the list) now have to pay more for money. This could mean that investors are worried and want more compensation for risk, which means that the reality of the economy is shakier. OTOH, it could mean that investors are being more realistic, and not letting risky companies just have cheaper money to make value destructive decisions could be a good sign of sanity in the markets, and thus (in theory) the economy. It's hard to know with a simple headline or article. Even if you dig into all the numbers and do all the reading, it's still hard to know since the world is really complex.
I look at this as a single data point amongst many re: how I end up assessing my feelings about the economy. Truth be told, I'm probably more concerned about what lots of news outlets are discussing - all the AI capex spend. Apparently there's more financing being negotiated with fewer restrictions on the debt, which tends to be a really bad sign of a bubble.
All that said, my slightly informed mildly-hysterical opinion is that aggregate downside risk is absolutely out of control in the markets right now. Valuations of basically everything are at all time highs relative to production. Volatilities are high. And non-economic risks are off the charts.
Basically, everyone is placing too many bets. AI stocks are bets, sure. VCs have too much money in play. Datacenter spending is a giant bet.
But the Trump administration is also placing bets on world trade markets, expecting to win the trade wars it keeps provoking. Likewise it's betting on US labor stability with mass deportations, and now para-sorta-maybe-martial-law decrees. I mean, let's be honest: the risk of a general strike in the USA is probably higher now than at any point in the last century.
Oh, and Russia seems about to hit a tipping point in its refining capacity, which says dark things about Europe too if that goes awry.
Basically most of these look "not really that scary" from a fundamentals perspective. But what are the chances we make it through the next 9-12 months with none of them having gone sour? And any of them could be the trigger for a real market crash!
I'm moving almost everything out of volatiles, personally. The loss of the next 10-20% of upside seems like a good bet vs. what-maybe-50%-or-more downside.
To late to edit it in, but you'll note in my doomeration of downside risks I completely forgot that the government is shutdown! Things are messed up enough that I can't even remember why they're messed up!