With full and complete credit to the Bard (Macbeth), and to Mr. Ray Bradbury who repurposed this line as the title for his 1962 dark fantasy (of which I was and still am a huge fan), there is just not a better title for this note. Trust me. A few weeks ago, I inked a note about whether the current expansion was soon coming to an end and whether it made sense to begin to “get the distressed debt band back together again.” Tongue slightly in cheek then because things seemed awfully good, I made the argument that we are not really all that far away from an abrupt right turn off the highway of good times onto the dirt road of distress. It apparently resonated (or at least there’s lots of people who think like me). Dechert is hosting a distressed debt conference on October 18, 2018 in New York which will touch on a wider range of issues but will include a distressed debt panel and we now have almost 400 RSVPs. We’ll report on that next week. That’s either 400 people with nothing better to do, or 400 folks who think it might just as well be time to start thinking about the end of days.
And that in turn makes me think a bit more seriously that this might really be a timely issue. As a card-carrying member of the commentariat, I have a free pass to take the dismal side of any issue because, hey, if I’m wrong, everyone is happy, no one remembers and who cares? But, if I’m right, then I get to endlessly annoy everyone with my vision, insightfulness and all around perspicacity (not to mention wit and charm). So here we go.
We had a big team down at the SFIG conference in Miami a couple weeks back where the vibe was isn’t this great! but oh, my God, if everyone is thinking, it’s great, that’s a serious tell for the fact that it’s not? Deal volume across structured finance spaces is enormous. Is it enormous because the good times continue to roll, or is it enormous because we want to get one more trade in before the last train leaves the station? There’s good arguments on both sides of that question.
Let’s start with the “What me, worry?” side. Dow is at an all-time high (albeit it dumped a disturbing bucket load of points this week), the ten-year is at a multi-month high and it appears to be driven by a healthy economy and not (yet) anxiety over inflation or, God help us, stagflation. The real economy continues to grow. The Orange Swan in Washington continues to scare the hell out of a loads of people with a certain perceived randomness of purpose and focus, but, at this point, things are looking up on international trade, which seem to have been the biggest issues concerning the marketplace and geopolitical risk, if not better than years gone by, doesn’t seem to be notably worse. The new tax regime is certainly helpful (at least for business). The retrograde tide of the regulatory state the same. We have a lot of business-friendly rumps in regulatory and judicial seats, which is good. We have an election coming up and historically markets have done well after midterm elections, particularly when the out of power party turns the House and that is certainly seeming likely right now, isn’t it? While healthcare is still a mess, it was a mess before.
Frankly, there’s not much undone on the above the fold part of the business-friendly agenda of the past several years. If we see split government for the next several years, maybe not much gets done… and maybe that’s not so bad.
And now for a quick trip down Cassandra Lane.
Emerging economies are beginning to underperform and projections of world economic growth are being trimmed. US polity seems ripped in half over issues from tax policy to inequality, to judicial appointments to briefs vs. boxers and almost everything, and that can’t be good. Geopolitical hotspots remain with the cauldron bubbling in the South China Sea, across central Europe, South America, the Mideast and Africa. The European Union experiment is somewhere between in trouble and dire straits over Brexit, illiberal democratic experiments across the eastern edge of the continent and whatever the heck the Italians are doing. There’s the White House, there’s the Feds balance sheet which has ballooned to a place heretofore not visited, productivity remains painfully low. Finally, there’s the fact that all good things come to an end and we are now luxuriating in the longest expansion in modern history.
In a world of enormous interconnectivity and complexity, it doesn’t take a lot to go wrong somewhere for damaging reverberations to ripple out across everywhere and cause a significant slowdown here in the US. Doesn’t it feel like there is an asymmetrical risk of continued growth versus a certain ebbing of the tide of this long lived expansion? (And if we only had to worry about a gentle ebbing as opposed to a riptide of a violent contraction that would be lovely…but we don’t.)
Doesn’t it seem like the smart money should be on the downside?
And that’s where the smart money needs to be, or at least fixing to go right now. It’s time to start to develop distressed debt strategies and strategies for thriving in a market of increasing interest rates, decreasing asset values and volatility. Obviously, getting ready before the events occur is the key here if we want to avoid the unalloyed pleasures of another August 2007 or October 2008. To wait for the game to really be up, is to wait too long.
Can money be raised at this point for those strategies? Maybe not yet, but the infrastructure, the connectivity, the business planning and the relationships can be built now so that the machine can be turned on when the evidence begins to accumulate that the end is nigh.
Listen we’re horribly ill-equipped at this stage. We’ve got ten years of young bankers working who have never seen an asset do anything except get better. Technology changes have been enormous but do we have the tools to manage stressed assets and pools of distressed assets? Loan documents have evolved. The courtroom has changed. The law continues to develop… The next downturn is not going to be your father’s downturn. One relevant lesson from the Great Recession, is that you won’t see the next one coming. Even if what goes wrong is something you did not expect, if you have the dry powder, if you have the organization and the talent, if you have the… courage (this is a family friendly commentary) there’s vast amounts of money to be made.
So wow, let’s keep enjoying these amiable broad sunlit uplands (thank you, Mr. Churchill) of our ten-year long expansion for a while yet, but get ready for the end.
It’s going to end and probably end sooner than we expect. So, as Dr. Venkman said in Ghostbusters when confronting the perhaps reality-ending consequences of crossing the streams…, “I love this plan!”