Most every week we begin this post talking about the lack of consensus that financial markets and financial pundits are presenting. In addition to that most of our posts involve complaining about the Federal Reserve and their creation of these chaotic conditions. This week will be no different…
Intuitively we are in for some rough economic waters. The Federal Reserve kept interest rates artificially low- essentially zero - for more than a decade and then raised rates at the fastest pace of more than four decades. That makes for a rough environment - especially in some of the long-term planning that goes on in very capital-intensive businesses (e.g., the massive semi-conductor production facilities being built right here in AZ.) However, like we also frequently mention in this post – the economic environment is holding together remarkably well…
We can sit around and pontificate on how dangerous the economic/financial world is all we want, but sooner or later we have to look at statistical facts. Of course, one of the most important statistics involves companies that simply cannot survive and declare bankruptcy. We have referred to these numbers as they have been coming in from the real-world economy this year. Now we have completed the first half of 2023 and can make comparisons to historical norms…
In the first six months of 2023, there were 340 corporate bankruptcies, topping every other comparable span in 13 years, according to S&P Global Market Intelligence. This is up 93 percent from the same time a year ago and higher than in 2020, when there was a spike during the early days of the coronavirus pandemic. This is clearly of serious concern, especially when the Federal Reserve is indicating that they will be raising rates again in the fall. Here is another fun statistic - Year-to-date through June, 15 companies with more than $1 billion in liabilities filed for bankruptcy, such as Cyxtera Technologies, Diebold Holding, Bed Bath & Beyond, Diamond Sports Group., and Party City. Those are the big companies, but here is another daunting stat – according to Epiq Bankruptcy, a U.S. bankruptcy filing data provider, 2,973 total commercial Chapter 11 bankruptcies were filed in the first half of 2023, up 68 percent from the same period in 2022!
Obviously, the raising of interest rates has been the catalyst for a big percentage of these companies that are finally throwing the towel in. They are having a tough time refinancing debt at these higher interest rates – but another concern is how little banks are lending regardless of interest rates. A recent Goldman Sachs survey found that three-quarters of small business owners say they are worried about accessing capital as banking stress has forced the sector to tighten lending. Ladies and gentlemen, we are entering a credit crunch of sorts – but that is laser focusing on banks lending to smaller companies. Rest assured big banks and big companies are who the Federal Reserve works for and who their policies will not only protect but enhance. So, unless we see a larger capital market meltdown, maybe we aren’t staring at Armageddon. How does the age-old indicator of the junk-bond credit spread look?
As you can see the difference between junk bond interest rates and “no risk” 10-year treasury bond interest rates looks relatively OK. Junk bond yields are higher than most of recent history, but 10-year treasuries are higher than they have been since 2007. The spread between these yields is about 4% - which is fairly high historically but take a look at 2008. The difference between interest rates on junk bonds and treasuries was more like 20% then!!! So, what does that mean to us as financial market investors today? In overgeneralized terms it means that we don’t appear to be looking at a widespread capital market panic at the present. Yes, there are lots of corporates (especially smaller companies) going bankrupt, but that is part of a free market system. From a systemic perspective, we aren’t sounding alarm bells…
Remember the Federal Reserve is manipulating the system in meaningful ways right now backstopping the big banks and it appears to be working. They continue to involve themselves in the inner workings of everything financial to greater degree as the crises they engender stack up. No one can be certain that this manipulation will continue to stave off disaster in the long run – and actually history says that it won’t – but no one can time these sorts of macro-changes. The Federal Reserve created $6 trillion out of thin air to support markets after Covid. We are worried about the size of the next bailout…
Considering that, we are fans of building a plan “B” to this monetary system. That involves building gold reserves and deploying some of that gold to earn interest in gold. It is a grass-roots monetary system that is gaining a lot of momentum. Let us know if you would like to look further into it…
Regards and good investing,
Greyson Geiler