A new warning sign is flashing now, reaching levels not seen since 2008 and indicating the credit markets are in trouble.
- This Quietly Rising Blue Line Spells Disaster for the Credit Markets
- Three Big Banks Release Earnings Tomorrow - Here's How Their Stocks Will Move
- This Credit Market Barometer Shows Heavy Storms Ahead
- Warning: Business Development Companies Just Got Doubly Risky
- What Credit Markets Are Telling Us About Stocks Now
Private equity firms serve as a startlingly accurate credit barometer. The less productive their behavior, the more likely the cycle is reaching its late stages.
When credit is mispriced, the credit cycle is far advanced, and debt investors should be running in the other direction from bond and loan offerings involving private equity?owned borrowers... because private equity firms are doing two destructive things.
At this point of the credit cycle, a lot of securities look cheap.
Business Development Companies (BDCs) are looking exceptionally cheap right now - trading at 82.7% of their net asset value and kicking off very high income of 10% to 17% at the same time.
Due to their structure as closed-end funds that pay high dividends, BDCs are designed to appeal to retail investors.
The problem is that investors often forget that high dividends come with a price - and that price is usually that the loans made by these companies are illiquid and high risk.
Rather than trust markets to heal themselves, the world's central banks have polluted markets with flawed economic theories and trillions of dollars of debt. Rather than ignite economic growth as they had hoped, however, they have suffocated the global economy.