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3 Takeaways From Deutsche Bank’s ‘Imminent Default Wave’ Call
"A default wave is imminent."
So said Deutsche Bank's Jim Reid in the 2023 vintage of the bank's annual default study, published Wednesday.
For context, last year's edition suggested a two-decade stretch of suppressed defaults was poised to end amid elevated inflation and policymakers' efforts to combat it with higher rates which would be foisted upon levered corporate borrowers. Fast forward a year, and the moment is close at hand, or at least according to Reid's "trusted cycle indicators."
Actually, this seems to be a plausible forecast. I’ll look forward to your take in a deeper dive. The excess corporate borrowing to fund stock buybacks has created some very weak capital structures, thus far mostly ignored by the street. My bellcow is KMB which has been carrying a high credit rating with negative net worth for nearly a decade. I’ve got the stock for dividends but I have been donating it because it will suffer. If I were a CFO I be selling stock to lower my leverage if it was above normal. Firms with three or four times debt/equity ratios may look good enough but they are not if operating leverage attacks profits in a even a moderate downturn. Labor costs have risen in many areas and though layoffs cut costs, they also cut output capacity in the long run.