Entering text into the input field will update the search result below

Stress In The Financial System


  • With the exception of US bank balance sheets, the financial system is all that much more robust than it was at the outset of the financial crisis, in our view.
  • Problems center mostly on the quality and quantity of outstanding corporate debt.
  • Stress signs are already emerging, and we know from a decade ago that once things get sufficiently bad, they can feed upon themselves.
  • It's a little early for panic, though, but keep in mind there are parts of the rest of the world where things look worse and contagion is another risk.

We think the US financial system still suffers from the same structural weaknesses as it did in 2008. These weaknesses are:

  • Perverse incentives (investors making bets with other people's money avoiding negative consequences when these bets go wrong, central banks forced to interventions increasing moral hazard, etc.).
  • Excessive leverage.
  • Excessive complexity (Frankenstein derivatives that hide risk).

This is not a serious problems in good times, but things are taking a distinct turn for the worse, opening the prospects of serious financial stress emerging.

It is perhaps a little early to start predicting Minsky moments, where these stresses turn into self-feeding mechanisms (credit crunch, forced liquidations, freezing markets, falling asset prices leading to more forced liquidations, etc.) as US banks, for instance, are more robust than at the outset of the previous crisis. But we warn against getting too comfortable.

Where is the risk?

Well, for starters there is a whole lot of debt out there:

  • World debt
  • US corporate debt (quantity and quality)
  • Leveraged loans

The markets are in a funk because of the economic consequences of the worldwide coronavirus outbreak and the botched response in many countries, among which the US, where there are still no sufficient amounts of test available two months into the crisis, although at least the availability is now increasing.

With increased testing come increased cases, as the virus has been spreading for weeks undetected and nobody really knows how widespread it is in the US.

Economic effects will follow this (we have argued a couple of weeks ago that a recession is likely); the question which will be addressed in this article is whether the economic and financial market impact will expose frailties in the financial system that could potentially morph into something more nasty.

We know from 2008 that the financial

This article was written by

Shareholders Unite profile picture

Shareholders Unite is a retired academic with 30+ years of experience in the financial markets. He looks to find small companies with multi-bagger potential while mitigating risks through a portfolio approach.

He runs SHU Growth Portfolio where he offers wide coverage of several small companies with high growth possibilities. He has a buy and hold approach with tranche purchases of stocks of interest. The service features an illustrative portfolio to incorporate into your portfolio, buy alerts, weekend stock and market updates, and a chat room. Learn more

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (7)

SCF12 profile picture
a bear cycle in a secular bull market. debt services obligations can be a serious focus.

we'll make money. it's more fun to be long, but we can short things just as easily, and the speed of money making is normally driven when fear peaks.
"First, according to the Federal Reserve Bank of New York, net leverage — the ratio between a company’s net debt and its earnings before interest, tax, depreciation and amortisation — is roughly equal for triple B rated bonds and high-yield debt. Investment-grade bonds, excluding triple A rated debt, have even higher net leverage than high-yield." Does that say Net Debt/Ebitda=1 for triple B bonds?
thumb.ai profile picture
Thank you, quite different information presented from what I am seeing elsewhere.
Little, Einstein profile picture
Beautiful article
Shareholders Unite profile picture
Thanks, my pleasure Albert.
To quote Iron Maiden:

Run to the hills
Run for your life
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

Related Stocks

SymbolLast Price% Chg
SPDR® S&P 500 ETF Trust
Invesco QQQ Trust ETF
Vanguard S&P 500 ETF
SPDR® Dow Jones Industrial Average ETF Trust
iShares Russell 2000 ETF

Related Analysis

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.