Thread by @BitMEXResearch

Anatomy Of The Next Global Financial Crisis

In 2008 risk was elevated by leverage in the banking system & the securitisation of the mortgage market. Today the equivalent risk is in the asset management industry, in particular the corporate debt market

blog.bitmex.com/anatomy-of-the…

2/ Bank balance sheets are stronger than they were in 2008. Over the last decade, bank management teams and banking regulators have operated in the shadows of 2008. As a result, bank balance sheets and capital ratios have significantly strengthened.

3/ Perhaps even more compelling, is the following more simple chart. It illustrates that the main western banks have not expanded their balance sheets at all since the global financial crisis. Actually, the sample nine major banks we have reviewed saw a decline in total assets

4/ In contrast the asset management industry has significantly expanded since 2018 and the use of leverage has also increased

5/ Hedge funds have also increased their usage of derivative contracts, further increasing the effective leverage in the industry

6/ Replacing banks in the corporate debt market, is a network of unconventional interrelated vehicles, such as CLOs, Leveraged Loans and ETFs. These are held by the asset management industry and the market has been expanding rapidly.

7/ Corporate debt levels have increased considerably since 2008, with gross debt of Russell 3000 companies now totalling US$11 trillion, compared to being just over US$8 trillion at the time of the last crisis

8/ There is a considerable volume of corporate bonds set to mature in the coming years. This could exacerbate the impact of any liquidity crisis or stress in the fixed income sector. As our analysis shows, US$ 880 billion of corporate debt in the US will mature in 2019

9/ Corporate credit quality is also deteriorating. From 2021 the overwhelming majority of corporate debt maturing will be at the lowest investment grade rating, in the past it was lower than 40%. There has also been a significant deterioration in the quality of leveraged loans

10/ Unconventional monetary policies in advanced economies have squeezed investment returns and volatility, all while reducing borrowing costs. This low vol environment combined with record corporate debt levels, has created a climate where the following scenario could occur:

Inspiration for this piece includes:

* Raghuram Rajan on @Freakonomics - freakonomics.com/podcast/rajan/

* Chris Cole on @MacroVoices - macrovoices.com/podcast-transc…

* "Leverage on the buy side" from @BIS_org - bis.org/publ/work517.p…

* The Debt Machine from @FT - ft.com/debt-machine