US households have spent much of the past decade deleveraging, notes John Mauldin in his Thoughts From The Frontline newsletter. Companies haven't. They have grown debt much faster than earnings, not least because many have borrowed to fund stock buybacks rather than invest in their operations.
The upshot is that firms are 50% more leveraged now compared to their profits than in 2007. The quality of investment-grade paper has also deteriorated: the lowest tier, BBB-rated debt, now comprises 50% of all issuers. "All these are just one downgrade away from being junk bonds'." Many funds are not allowed to hold junk, so their forced selling will exacerbate the downturn when the next recession hits.
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