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Next Crisis?
The Market Bull 2018

00:00 / 2:28

The major averages enter the final hour with modest gains on little real news. Consumer credit comes out after the close and it will be interesting to see if consumers go wild with the credit cards again during June, following May’s outsize gains.

The war of words between Chinese State media and Donald Trump regarding trade tariffs and winning trade wars continues. With more rhetoric regarding who’s actually winning after Trump cited a sharp 27% decline in Chinese stocks as proof of said winning. Never mind that our trade deficit continues to climb, but then again, Trump telling the truth has hardly ever been a concern.

One of the primary catalysts of the 2007-2009 financial crisis was the use of various “off balance sheet vehicles” as they were called to hide corporate debt. Debt that was then instrumental in the failure of a couple of hedge funds, Bear Stearns and Lehman Brothers as the crisis got underway in earnest. Along comes credit rating agency Fitch Ratings warning about a new and improved version of debt concealment, reverse factoring. This was cited as a primary cause of British services giant Carillion’s failure a few months ago. I touched on this at the time and it went largely ignored by the mainstream media as well. As Fitch points out the widespread and extensive use of reverse factoring could well be concealing the next financial crisis especially considering the record levels of corporate debt, much of it high yield or junk at present. As an example Carillion used this technique to show a debt level just 1/3 of what it truly held, per Fitch Ratings data. They noted that Carillion had kept the reverse factoring data very quiet and that current regulations had allowed the company to get away with it. They went on to note that there was no way or really knowing just how extensive this problem was, but anecdotal data suggested that it was both extensive and growing rapidly since 2014.

This is Caleb Lawrence Registered Investment Adviser Scotts Valley Drive and Willis Road in the Scotts Valley Plaza, Suite 202 or call me toll free at 888-RICH PIG / 888-742-4744.

You can catch me on the radio at noon each business day as well on California’s central coast. KPIG 107.5 FM in the Monterey Bay or KPYG 94.9 FM in San Luis Obispo.

Rebroadcasts, additional writings, and other entries are also available on my Blog at www.clinvestments.com

Advisory services offered through Caleb Lawrence Registered Investment Adviser Inc.


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