Whenever I look for reliable information that tells me what's really happening in the economy the best places I have found to look is in statistics that aren't easily manipulated like sales of Cardboard boxes for example. It turns out that the amount of cardboard boxes sold is a very accurate predictor of economic activity and right now it is flashing bright red:
Another indicator I look at is "same store sales" which is a broader metric and not as easy to cook:
When you consider how much stimulus was issued to soften the covid lockdowns and disruptions it's astonishing that the economy couldn't even make that stimulus last a few years. Right now, the 5% interest rate and the uncontrolled damage it's causing on balance sheets everywhere hasn't even begun to set in yet. It takes 12-18 months for rate hikes to start to be felt in the broader economy and this brutally fast hiking period started about 15 months ago.
That means that we are about to see Trillions in credit lines and other types of revolving debt that need to be re-financed this year (and also for the next 2-3 years) at MUCH higher rates. Many companies are already struggling to service debt with rates between 2-5%.
"The global risk premium has increased dramatically and is increasing in an unpredictable arc. This structural trend of higher risks will reprice everything."
The global economy is changing in fundamental ways, and this is repricing everything: the cost of money/credit, the price of assets, the value of hedges and insurance, and so on. The core driver in all this repricing is risk, for it's the reappraisal of risk that forces the repricing of everything."
Commercial real estate is a hot mess right now and the fall out from the multi-layered defaults that will result from empty malls and office buildings is hard to imagine.
"Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013, according to Trepp.
Typically, owners pay off this debt by getting a new loan or selling the building. Now, steeper borrowing costs and lenders’ growing reluctance to refinance these loans are raising the likelihood that many of them won’t be paid back."
All bank lenders and private lenders like myself can see these signs and it has increased the risk premium considerably for offers we make for working capital. Although rates haven't changed in the private lending community at all the last 5 years the percentage of approved requests has dropped.
Most of my clients are dealing with similar problems: Lower sales volume and few financing options. Hiring is also in crisis as most of the business owners I speak with are understaffed and struggling to find qualified help.
When it comes to funding operations with working capital, there are more challenges than opportunities right now. Business owners are suffering from "sticker shock" when they see private lender rates for the first time but good offers especially for higher credit profiles are available. Call me for a quote!
Here are some articles I used to research this post:
Nearly $1.5 trillion in commercial mortgages are coming due over the next three years