SocGen’s Albert Edwards is concerned about bankruptcies.
That might seem odd coming from the man who spent his summer lamenting “Greedflation” as manifested in fat corporate profit margins which, despite falling for several quarters in a row, never rolled over commensurate with what should’ve been gale-force headwinds including higher wage bills and rate hikes.
On that latter point, Edwards was astounded to discover that in fact, some corporations are now beneficiaries of higher rates. Having locked in low borrowing costs in 2020 and 2021, some US large-caps were able to fund operations with cheap cash while earning 5% on the rest.
Aggregate profit margins rose in Q2, while interest payments as a share of economic profits sit near all-time lows.
But as Albert’s colleague Andrew Lapthorne was keen to point out, this dynamic applies mostly to large-caps. For smaller companies, rising rates do still matter, and Edwards made as much clear on Thursday.
“In recent weeks we have investigated how higher interest rates have led to an unprecedented collapse in net interest payments despite the US corporate sector being a massive net debtor,” Edwards wrote. “This ‘new normal’ certainly seems astonishingly abnormal to me [but] if you look just below the very large-caps stocks, the old ‘normal’ still applies, with higher rates triggering a surge in corporate bankruptcies that will surely lay low the overall economy.”
As a quick aside for the uninitiated, when Albert says an economic calamity will “surely” happen, you have to take that with a grain of salt. Even Edwards super-fans (and there are thousands of them) know his hyperbole isn’t meant to be taken 100% literally.
That said, bankruptcies are rising. Specifically, Chapter 11 filings were up more than 50% in August, according to Epiq Bankruptcy, a leader in the bankruptcy data analysis field. August marked the 13th straight month during which total bankruptcies — which include individuals and families — rose versus the same month a year ago.
The American Bankruptcy Institute blamed, in part, rising rates. “Elevated interest rates, rising prices due to inflation and resumption of student loan payments are just a few examples of the economic headwinds facing businesses and individuals,” according to a statement from ABI Executive Director Amy Quackenboss. “I think a lot of it is interest rates,” Ed Flynn, an ABI consultant, said, in remarks carried by Bloomberg.
What does it all mean? Well, Edwards summed it up with some of his trademark bearish embellishment. “Most companies are still living in the ‘real’ world where higher rates hurt,” he wrote Thursday. “To the extent post-GFC QE and direct COVID pandemic relief kept so many zombie companies on life support (an oxymoron?), the recent sharp rise in rates really could cause a shocking rise in bankruptcies beyond all fears.”
Quackenboss was a bit less overstated. “Struggling families and companies looking to find their financial footing are increasingly turning to the established path of bankruptcy,” she said.
Hey, isn’t that good for stocks?
Good, in that the fewer zombie companies out there (and there are a lot), the more money available to fund/buy up going concerns with solid balance sheets?
I saw charts of interest expense / sales for SP500, SP400, and SP500, and the ratio is rising steadily for all three market caps and is highest for small cap and lowest for large cap. So I think rates are biting – not for the Seven Galacticos, perhaps. Assuming the data is pulled from reported financials, that is likely net interest expense, which makes it even worse.
Going all the way down to households and small private companies, I have no doubt that rates are biting. Aside from mortgages, there’s not much scope for households and small privates to “stock up” on low fixed rate debt.