Why ‘one of the most dangerous charts’ in all of finance should be ringing alarm bells

‘Credit channels might start amplifying the economic fallout’


While stocks are understandably stealing the headlines in Monday’s nasty trading session — the Dow Jones Industrial Average DJIA, -7.78% dropped more than 2,000 points early — the real danger to the U.S. economy could ultimately come from the credit markets.
Holger Zschaepitz, a popular financial commentator and author of “Debt without atonement,” or “Schulden ohne Sühne,” tweeted out this illustration from Deutsche Bank economist Torsten Slok, calling it “one of the most dangerous charts in financial markets”:
He pointed out that U.S. credit markets have exploded from $2 trillion in 2008 to $7 trillion these days. The driver, as you can see, has been a surge in single-A and BBB paper — the latter, Zschaepitz says, could fall into junk, or noninvestment grade territory, if/when the recession hits.
J.P. Morgan Chase also cautioned investors recently of the stress that’s taking shape in corporate debt amid the coronavirus outbreak, which has spread to nearly 110,000 people and claimed 3,800-plus lives, according to the latest tally from Johns Hopkins University.
“The economic fallout from the COVID-19 crisis is raising questions about credit and funding markets,” the analysts wrote in a note, adding that much of the concern will be centered on the airline, travel and leisure, and retail sectors. “If these shifts in credit and funding markets are sustained over the coming weeks and months, especially in the issuance space, credit channels might start amplifying the economic fallout.” 

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