Warning Lights of a Credit Market Crunch
Despite our effectively being in the ninth year of what would typically be a seven-year credit cycle,indicating that historically we are due for a correction, a consensus remains that there is no foreseeable danger of a downturn ahead. According to a recent Wells Fargo/Gallup Small Business Index Report, 71% report that their business improved in 2017 with 75% reporting that the economy is strong and they expect their business to expand.
On the flip side, the National Association of Credit Management recently reported that while corporate earnings are on the rise and default rates are less than 3%, the "dollar collections" index, a measurement of the ability for creditors to collect money owed, collapsed in April to its lowest level since early 2009. Because they cannot point to a specific factor, NACM acknowledges that the collapse could be an anomaly. However, they also acknowledge that challenges with servicing the $14.5 trillion of increased corporate debt are on the horizon. Servicing debt from new bank loans that are affected by interest rate adjustments will be especially demanding.
The warning lights have caused well-known firms such as Guggenheim, Pacific Investment Management Co. and Black Rock to curb their investment strategies. Perhaps it is an advantageous time for the turnaround industry to shore-up and start preparing as well.