...The entire world went into debt for the equivalent of tropical vacations and, having now enjoyed them, realizes it must pay the bill. The resources to do so do not yet exist. So, in the time-honored tradition of lenders everywhere, we extend and pretend. But with our ability to pretend almost gone, we’re heading to the Great Reset.
...We should also note that, through the magic of double-entry accounting, each dollar of debt liability appears on someone else’s balance sheet as a $1 asset.
...(If we could somehow make this debt magically disappear, we would also make wealth disappear,
... Institutions have rules that will make them start selling troubled bonds early. Liquidity probably won’t be there. Clearing the market will require sharply lower prices, which will create more selling pressure and eventually recession.
Steve Wasserman’s last weekly commentary is a good capstone here:
Moody’s has issued a statement that CMBS loans are now almost as risky as in 2007 because 75% of them are interest only, and the interest only period is now 6 years, up from 2.2 years just a few years ago. In addition, they are becoming much more covenant light, and are at higher leverage. All of this is a red flag since these things create much more risk of serious problems when the recession hits. There is also a bigger concentration of single tenant properties, which, as we have seen in retail, can be deadly in a recession. Asset and sponsor quality is also deteriorating. There is now so much competition to put out loans by so many non-bank sources, that borrowers can get lenders to compete, which always means lower quality underwriting. Far too much capital chasing too few good deals.
Others will have opportunity as well—even you, if you are holding cash and in position to buy some of the valuable assets that will get “restructured” in the next few years.
