VTI - Debt Iceberg: Melting

2023-04-27 10:38:07 ET

Summary

• Might the debt bubble in the United States be about to collapse?
• Lots and lots of debt has been created over the past decade or so and with rising interest rates more and more of the debt is underwater.
• Furthermore, the asset bubble the Federal Reserve has created seems to be collapsing, and this is going to impact many different areas of the financial world.
• Right now, the world of Special Purpose Acquisition Companies seems to be on the verge of real problems.
• And, it doesn't look like things will get better for those holding debts that were created over the past several years.

Wall Street Journal writer Greg Ip might be pointing to the next turn of events.

Mr. Ip is writing about the possible collapse of the debt bubble that was created by the Federal Reserve during the last decade or so.

"Since the end of 2009, total debt owed by governments, business and households has risen 90 percent to $68 trillion...."

"Since early last year, interest rates have risen at their fastest pace since the early 1980s."

"The economic reality is that those bonds and loans are worth a lot less than when they were issued, and someone has to bear the bear those losses."

The asset bubble expanded in the early 2020s...and, the asset bubble is contracting here in 2023.

Mr. Ip writes about the expansion of debt all over the financial world and, besides banks, he mentions pension and mutual funds, private-credit funds, life insurers, business-development companies, hedge funds, and other nonbanks - or, as they are sometimes called, shadow banks.

But, there have been other vehicles chosen, ones not always overseen by many investors or by regulators.

The SPAC World

One area that I have been particularly interested in over the past three years is the blank check world, the world of Special Purpose Acquisition Companies, or SPACs.

Amrith Ramkumar writes in the Wall Street Journal :

"SPAC deals were supposed to provide a big lift for young companies, giving them cash and a stock-market listing. Instead, they put them under pressure to deliver and left them vulnerable to rising interest rates and the vagaries of public markets."

In other words, when money was flooding the market, SPACs were looked on as a super way to get hold of money.

When the Fed reversed directions, the asset bubble that the SPACs had taken advantage of, fell away.

"First-quarter earnings report coming in the next few weeks could be a tipping point for many companies. The reports are expected to show declining cash and little chance of turning profits quickly enough to avoid a bust."

"Shares of many of these companies trade under $1.00, more than 90 percent below where they did when they went public, and are in danger of being delisted. Those that have raised cash typically have done it on onerous terms."

"Many of these businesses were worth billions when they hit the market and drew in small investors excited at the prospects of space tourism, cryptocurrencies, and electric cars."

"Companies that went public this way have since collectively lost more than $100 billion in market value."

Note that only about 15 percent of the companies that did SPAC deals during the record year of 2021 were profitable.

The good times are over.

The other side of an asset bubble is not pretty.

This Is Where We Are

But, this is where we are.

And, Mr. Ip presents the problem.

"There is little regulators can do about the underlying problem."

The Federal Reserve is fighting inflation and the federal government is trying to reduce the amount of government stimulus that can take place.

The next sector of the economy to become overly active?

The bankruptcy courts?

The SPAC world may be the leader in this outcome.

A lot of money was committed, a lot of flashy hopes were played upon, and a lot of "dreams" were constructed.

The policy battle in Washington, D.C. is not going to get better.

A lot of pain can be predicted for the future.

The SPAC community may present only the top of the pile of debt that will be written off.

And, the narrative just does not get better.

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