In our Market Ledger, one of the “debits” for the market is chronic insolvency. We have not really
begun to see the full impact on jobs and businesses due to improved unemployment benefits,
stimulus cheques and business lending schemes, but that will change as stimulus is tapered
and the effects of the lockdown catch up with the economy. Even in a garden-variety recession,
it takes about 12-18 months for bankruptcy filings to peak (top-left chart). The size of the
shock and the persistence of demand-destroying social-distancing measures mean the peak
could be higher and come quicker this time despite government and Fed help, which is after all
focused on larger and mainly IG firms. A credit shock is likely to ensue too despite stimulus and
regulatory forbearance, with the sharp fall in our US leading indicator consistent with economic
stress that is likely to lead to rise in bank-loan charge-off rates (top-right chart).

Unemployment is high, and this will aggravate a deteriorating credit situation in the coming
months (bottom-left chart). Businesses failing, people losing their jobs and banks tightening
credit due to worsening loan assets is a deflationary environment, and indeed lower inflation over
the next year is what leading indicators, such as velocity, anticipate (last chart). All of this gives
ample cover for the Fed to dial up the intensity of the “big ease”, making it difficult for
markets to suffer much more than a relatively modest (5-10%) correction.

Source: Bloomberg, Macrobond and Variant Perception