Corporate Defaults STARTING | Warning - The Debt Bubble.

well folks Goldman Sachs thinks there

could be a wave of defaults coming and

the defaults are not going to Peak this

quarter they're not going to Peak next

quarter but instead they're going to

Peak

in the first half of 2024 which is

actually where there's some alignment of

current recessionary expectations which

is not great news let's take a look at

this and see if there's some things that

we should really be concerned about this

is the Goldman Sachs Global Credit

Trader research uh what we have are a

peak mid-year but no Spike uh okay

interesting we expect the 12 month

trailing us default rates to peak in the

first half of 2024 at 4.6 and 6.7

percent for high yield and leveraged

loan issuers those are kind of like

think about like your cruise lines where

you know when they're borrowing they're

borrowing at like 13 or whatever

in Europe the default trend has been

more benign than in the us but we do

expect the pace of defaults to modestly

increase in the first half

uh and so this is leading a lot of

people to be very concerned that oh my

gosh you know that's how it starts you

know you start getting some defaults

when you start getting defaults what

ends up happening well you end up

getting job loss that leads to less

earnings for big companies and then they

have to lay off people and that's how

you get a recession

that's definitely possible but

fortunately these Peaks do not seem that

dramatically high and it makes sense in

fact last week we covered a story where

we analyzed the net interest payments by

market cap and we found that net

interest payments for Mega cap companies

and large cap companies were actually

declining that is the amount of money

companies we're spending on interest was

going down not up people like how is

that possible well it's possible because

what they're doing is they're borrowing

along and they're depositing short so

they borrow for a 10 20-year period they

take that money like an apple they

borrow at say four percent they deposit

it into a money market getting 5.5 they

win they profit the difference whereas

smaller riskier companies are getting

screwed smaller riskier companies like

Cruise Lines or even small caps like

maybe even a matterport they're having

to pay substantially higher interest

rates they're not able to borrow at

those lower rates and that increases the

default risk for for these sorts of

companies substantially since the start

of 2021 there's been a total of 266

billion of rising stars in the USD

Market just more than reversed the 230

billion dollar coveted wave of fallen

angels that said only 112 billion of the

230 billion downgraded in 2020 has

migrated back to growth suggesting a

robust pipeline

coming up okay fine refinancing what do

we got here compression Cash Cash

availability fine let's skip some of

this all right how large how constantly

the share of U.S the US dollar

denominated high-yield bonds maturing

within the next 12 months has nearly

doubled

that increases interest expenses for

companies with the higher borrowing

costs that we just talked about so in

other words

the amount of companies that are like oh

no we have to refinance in other words

bonds are coming due we issue new bonds

at higher rates replace the old ones has

increased double twofold uh nearly uh

for the next 24 months increases the

risk of more defaults that's how they're

increasing getting to this higher level

of defaults expected here's a chart by

the way of the defaults they're

expecting and how you can kind of

compare them to previous levels so we've

got sort of a peak drawn here for the

high yield bond market these defaults

would be somewhat similar to what we saw

in like 2012 nowhere near the defaults

expected of what we saw in 08 so a six

percent level of default shows you that

this isn't like a recession level of

defaults it would there'll be an

increase in default and this default

level is still ramping up we're not in

that down ramping phase we actually had

more defaults in covid more defaults in

2016 and again this would just be

similar to about 2002 12 of the failure

of companies well quite interesting so a

few weeks ago Goldman updated their 2023

full year whoops uh issuer weighted

defaults forecast to 3 8 and 6.5 in the

leveraged loan Market again those

numbers go up for 2024 to 4.6 and 6.7

percent we then expect a decline that

will push the full year default rate

back to three and a half percent in high

yield and five two in leverage for both

markets our U.S economists soft Landing

Baseline view greatly limits the risk of

defaults in other words though if we

don't get a soft Landing these numbers

could all be a lot worse

assuming the FED delivers only three 25

basis point cuts the U.S uh that U.S

economists currently expect funding

costs for floating rate borrowers simply

will not come down far enough or fast

enough for some of the pressured issuers

to alleviate financial distress okay in

American they're basically saying Even

If the Fed starts cutting rates next

year it's going to be way too slow for

you to actually avoid default you're

still going to have to refinance at

substantially higher levels you're still

going to get absolutely whacked in your

net interest expenses and it's going to

be a problem that's going to lead to

defaults but those defaults thanks to

the soft Landing narrative aren't

expected to be that great so is this

like ridiculously bearish no is it good

um that's debatable some people say that

a lot of these companies are zombie

companies that have more debt expense

than they have free cash flow and they

deserve to go bankrupt and to some

extent that's capitalism if you have a

bad product you go out of business you

stop innovating you go out of business

look new burst Pro tangent we talk about

this and the uh how to make more money

and get sh9t done faster course

featuring AI course expiration this

Friday by the way on the 15th we talk

about these sort of things but every

business goes through Cycles and if you

were a business owner or you're even

just an employee if you're not

constantly thinking about what can I do

to stay ahead of my competition next you

will get replaced there's a line out the

door of people ready to take your job

and that shouldn't be depressing it

should be motivating it should motivate

you to stay ahead of your competition

are you working harder are you working

smarter and when the answer to those

questions is yes and yes then you get

paid more now I know then you get sort

of the pessimists that are like well

I've been you know I've tried to start

working harder and I haven't gotten paid

more yet well then you're either at the

wrong job or you're being too impatient

It's a combination probably but the

point is if you're not constantly

innovating you lose

and businesses that fail to innovate

deserve to die that's capitalism that's

how we make sure we don't get scams like

uh home builders in China building

skyscrapers

that are built so poorly that they

basically need to be demolished later

because the companies are just taking

government subsidies and grants and

stimulus building trash properties to

get more money and building them faster

to get more money faster and then they

end up having a crop product that's how

you create fraud and froth real

capitalism prevents that because the

capitalist

knows that the buyer is not going to buy

a trash property if your property's

trash it won't sell then you go to

business because you can't sell your

product and the Builder who actually has

a better reputation is able to sell

their properties and so that Builder

gets more business and those properties

sell for more money

capitalism weeds out this kind of stuff

so anyway uh this is probably a good

thing uh I do think it's very

interesting to kind of see the this this

increasing level of defaults and uh and

and how it looks historically uh I think

this is actually optimistic so it's a

good thing another thing that's a good

thing is you have four days left to

check out that coupon code at Building

Wealth link down below by the way have I

mentioned that when I live stream and I

make these videos I bring them to you

with the power of stream yard this is a

paid promotion but go to metcaven.com

stream yard learn more about how you can

use professional broadcasting software

so you don't actually have to install uh

uh you know stuff on your computer you

can do it all browser based through

Google Chrome with stream yard learn

more about stream yard we go to

metcavon.com stream yard