The UK faces intense anxiety about its future in Europe in June. Will England, Wales and Northern Ireland get knocked out of Euro 2016 in the group stages?


Reflecting the nation’s focus on this issue, I called my latest Fundamentals note “Yellow card”. I was originally going to call it “70 minutes” as I worry we’re currently in the 7th year of a possible 9-year expansion. But instead, I wanted to issue a caution (yellow card) to investors that we could be heading for a recession in 2018 – an important issue to tackle!

Credit cycles are self reinforcing. We have recently seen a rise in corporate delinquencies and a tightening of banks’ credit conditions

My key concern is that the US credit cycle might have turned. And sticking with ball analogies, like a snowball rolling down a hill, it can become more powerful as it picks up momentum.


This is because credit cycles are self reinforcing. The best example is UK housing. A government scheme to boost demand can push up prices as supply is fixed in the short term. Higher prices flatter banks’ balance sheets, making them more comfortable about lending which in turn boosts demand. This is why we get booms and busts.


The corporate version looks at the interplay between economic growth, corporate profits and bad loans.

We have recently seen a rise in corporate delinquencies (loans >30 days overdue) and a tightening of banks’ credit conditions. Optimists argue this is entirely due to the oil sector and will eventually wash out. But concentrated losses in one sector hurt banks as they have no upside to winning sectors. For example, when the oil price halves, banks receive the same interest payments from airlines (who benefit from lower fuel costs) but lose money when an oil explorer goes bust.

Moreover, US profit margins look to have peaked thanks to low unemployment. And with the Fed hiking rates, delinquencies should continue to rise, leading to a self-reinforcing tightening of credit conditions and weaker growth/profits.


While we don’t see an imminent ‘sending off’ for the US economy, further bad behaviour could see the game end.