Jonathan Rochford: When A Distressed Debt Manager Meets An Economic Bust | Nucleus Investment Insights

Are we heading into a classic central bank-created bust, following a boom fuelled by low interest rates?

 

So far this has been primarily about asset prices. Is it really a recession if unemployment remains low?

Minsky’s hedge, speculative and Ponzi categories are playing out as businesses/investments that can’t generate enough to cover their interest payments are heading to bankruptcy.

The most obvious victims are cryptocurrencies, venture capital and loss-making businesses.

Main areas of concern:
US commercial property, high-yield bonds and leveraged loans are much bigger but more of a slow burn. Defaults are ticking up, well above the last two years.

There is an increase in both the base rate and credit spread hitting borrowers at the same time.
Lenders/investors are also tightening their criteria. The Twitter loan is stuck with the banks that underwrote it, estimated to be worth about 60% of face value now. Recovery rates are much worse this cycle than previous cycles.

Refitting commercial properties for residential apartments seems logical, but zoning restrictions and layout issues (e.g. access to natural light, plumbing/electricity) mean it is often cheaper to demolish and start again.

Extension of the ideas
The review of the RBA missed the key change needed. Adding more economists and changing the number of meetings will do very little, we need to stop following Keynesian economics and cutting rates too far when downturns inevitably arrive. The review recommended nothing to stop the boom-bust cycles.

Population growth might stop Australia from having a recession, but per capita GDP could easily decline. We’ll pay for that sleight of hand in other ways. (housing affordability, infrastructure spending, lower quality of life)

In this investment podcast, Chief Investment Officer Damien Klassen, Narrow Road Capital Portfolio Manager Jonathan Rochford, and Senior Financial Adviser Samuel Kerr delve into this topic.

 

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