Higher interest rates equals bankruptcy filings skyrocketing.

December 11 (King World News) – Peter Boockvar:  I’m sure the bond bulls (I’m bullish/long on duration up to 3 years, bearish past 6 and neutral in between) are all excited about the Barron’s weekend cover article titled “Higher Interest Rates Are Here to Stay. What That Means for the Economy.” Rather than a contrarian indicator, the piece was much more nuanced and focused only on the fed funds rate and just compared the coming years to the 15 years of zero and near zero rates, not a tough hurdle to clear. In the article, it states we of course have the possibility of the Fed cutting rates next year but “The better question is where rates will settle in the coming decade.

The probable answer: below today’s target range of 5.25-5.5%, but higher than many economists and policy makers expected a year or two ago, and far higher than the near zero rates of the past 15 years.” The article did not speculate on the direction of long term interest rates. By the way, according to my friend Brent Donnelly, who writes Spectra Markets, he back tested Barron’s covers and “they’re not contrarian, they’re random and coincident indicators vs The Economist which is late cycle contrarian” he stated on X.

I say they better stay ‘far higher than the zero rates of the past 15 years’ because that and QE did damage to the economy in creating major distortions in the flow of capital that did not go to its most efficient places and instead flowed to anyone with a power point presentation and a heartbeat and got market participants drunk, particularly wasted in February 2021. Having interest rates above the rate of a sustainable pace of inflation is a good thing, it creates discipline in investing and lending, it is a benefit to savers, it creates a lending spread for banks, and it helps to keep prices stable, a key foundation of healthy growth. This all said, the 15 years of zero and many rounds of QE was a huge drug for markets and the economy that is not easy to shake and we’re still in the midst of a major transition/withdrawal that will still take a few years to adjust to and not without pain…

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In 2024, just looking at investment grade, high yield and leveraged loans (bank loans), and not including many other forms of debt like private credit, there is about $700 billion of debt that needs to reprice and in 2025 that number is about $1.1 trillion. This on top of all the debt that has repriced in 2023, including all that floating rate where I’ve seen interest expense for some double this year. 

Bankruptcy Filings Hit All-Time Record
My friends at Quill Research highlighted in their Weekly Quill said as of data last Monday “US business Chapter 11 filings were up 141% y/o/y, which took out the prior record of 139% y/o/y set during the GFC.” Now many of these are due to the higher cost of capital that has exposed challenged business models rather than due to an economic downturn of note. Imagine if we now have an economic downturn that some rate cuts won’t fix, assuming we don’t go back to zero rates again. Again, the transition/withdrawal will be painful and will take time but big picture and long term it is a good thing.

Bottom line, is the Fed Put back and the Fed has learned no lessons from their 15 yr rate and balance sheet experiment or should we expect a sustained period of time of REAL positive interest rates and a smaller Fed balance sheet that lets more of the market work rather than the FOMC continually trying to play god over interest rates. I hope for the latter. 

With respect to Wednesday and what the FOMC and Jay Powell will say, it was only 10 days ago at the Spelman College fireside chat that Powell said “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.” I expect him to repeat these words and also put yourself in his shoes. He knows full well and via a tough lesson that his crystal ball doesn’t work, just like the rest of us so Powell mostly likely is approaching 2024 meeting by meeting, CPI/jobs print, print by print, while still not forgetting the lesson of the 1970’s. 

Deflation Worries Overblown
Let’s roam around the world, sang the B-52’s. China said its November CPI fell by .5% y/o/y vs the estimate of a two tenths drop and I’m hearing the panic and word ‘deflation’ and how it is some bogeyman. Sometimes yes, sometimes no. And it was all due to the 4.2% y/o/y drop in food prices. Is that not a good thing for people who need to eat each day? Prices ex food and energy rose .6% y/o/y, no change from October. Consumer goods prices is where the price pressures are occurring, just as they are in the US, falling 1.4% y/o/y. Service prices were up by 1% y/o/y. 

China’s PPI fell 3% y/o/y after the 2.6% fall y/o/y in October. When Chinese manufacturing and commodity prices inflect higher, prices will as well but for now the price drops are a symptom of the global manufacturing recession that we’re all experiencing. 

Japan Currency Troubles Continue
The yen is getting slammed after the BN story that said “Bank of Japan officials see little need to rush into scrapping the world’s last negative interest rate this month as they have yet to see enough evidence of wage growth that would support sustainable inflation, according to the people familiar with the matter.”

Oh man, we’re talking all of 10 basis points that would end this dumb idea of NIRP and the BoJ still has it backwards as they should focus on lowering inflation in order to raise REAL wages rather than keeping policy so easy on the hopes of raising wages nominally and hope the growth surpasses the rise in inflation, thus raising them in real terms.

This story came out at around 2:30am so JGB’s didn’t have much time to respond but futures are rallying and doing so for the Nikkei too. Expectations still remain fully priced in for a rate hike by April.

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