7 ms·

Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

76 points by SREinSF 6y ago

echelon 6y ago
Companies were over-leveraged and didn't have cash stockpiles. They're trying to get liquid cash so they don't have to divest of assets in a market that isn't buying or go into chapter 11. All the same, people are willing to extend loans because they are long on the economy, recovery, and return to normalcy. The engines are starting again. The biggest issue was that companies were over-leveraged with debt. Maybe we'll learn a lesson from this, although I suspect opportunity cost will prevent many from being more prudent.
- remarkEon 6y ago
  >I suspect opportunity cost will prevent many from being more prudent. I suspect people will not evolve to be more prudent unless there are some regulatory changes.
  - marvin 6y ago
    Bankruptcies or stock offerings at crisis prices would help too. For instance, the airline Norwegian just accepted 95% dilution of existing shareholders in order to qualify for a government emergency loan. If they'd refused this, they would have gone bankrupt. Some shareholders were expecting a government bailout, and got a real beating. They're going to think twice about expecting a government bailout the next time.
    - remarkEon 6y ago
      I don't know that I see 95% dilution as totally reasonable terms for a bailout (though I know absolutely nothing about the details of that example), but making it clear that bailouts come with a cost seems like a good development ... so good on the Norwegian government for doing that.
      - marvin 6y ago
        Why do you consider that unreasonable, when the free-market option is bankruptcy? They got to keep 5%, rather than 0! The terms of the emergency loan was a certain debt:equity ratio, so in order to qualify, their very high debt load had to be reduced. This could be accomplished in any way the company desired, and it turned out that the only viable pathway was to allow bondholders to convert their loans to new shares at a favorable price. This led to a 95% dilution for existing shareholders. If they hadn’t done this, proper bankruptcy would have been the next step.
        zdkl 6y ago
        I wonder why this mechanism (converting potentially derelict bonds into equity) isn't more widespread. In cases where the underlying company reasonably could be expected to continue operating were its debt ratio lowered, apart from legitimate resistance of bondholders expecting debt+interest payments why wouldn't this outcome be preferred to bankruptcy?
        kgwgk 6y ago
        This is actually one of the possible outcomes of bankruptcy. The business may be liquidated but it's not the only option. There may be a restructuring and creditors may become the new shareholders after the orginal shareholders are (in most cases) wiped out.
        marvin 6y ago
        Perfectly agree that this is preferable to bankruptcy. I might have worded myself ambiguously -- the emergency government loan might be a sort of bailout, but it wasn't a gift to the shareholders. When I hear bailout, I normally expect the latter. The government is expecting the loan to be repaid, and to make that expectation likely, they're requiring the company to use market mechanisms to strengthen its balance sheet. The result in this case is that existing shareholders are practically wiped out. In the case of Norwegian, this is pretty clear-cut. They've been on the verge of bankruptcy before, and their losses now are mostly due to foreign routes shutting down. Even if you accept the somewhat dubious rhetoric that compensation is mandated when losses are partly due to government involvement, it doesn't apply to this case. There was no way they could service their debt during the Covid crisis. Some sharehoders were expecting the government to give an unconditional loan to be defaulted on later, or participate in a stock offering at prices high enough to preserve their ownership percentage. This is an unequivocal message to shareholders not to expect that sort of rescue operation in the future. Run your company with a debt ratio that will let you survive unexpected hardships, or accept the risk of facing such hardships on your own.
- Traster 6y ago
  Don't these yields suggest that people actually aren't willing to extend the loans which is why the yields are spiking. Double digit yields in a deflationary economy should indicate that these loans are being made with a high expectation of default.
  - C1sc0cat 6y ago
    I am surprised the Avis has to goto the junk bond market - the cruise line I can sort of get
    - pm90 6y ago
      The rental car market is strongly tied to the travel (both business and leisure) which has crashed. Why would it be surprising if a rental car company is in financial trouble?
    - lmm 6y ago
      I'd assume most of their business is renting to people who've just flown somewhere, and right now hardly anyone is doing that.
      - C1sc0cat 6y ago
        Ah true - though I wonder if their balance sheet wasn't that good to start with.
    - MR4D 6y ago
      Hertz is on the verge of bankruptcy so it only follows that the risk premium for Avis is high. Just think - if nobody is flying, who is renting all those cars?
      - TheAdamist 6y ago
        No one, they dont even have enough parking for them to all be idle simultaneously. The airport rental agencies near me have been renting out all the stadium parking nearby to use as overflow storage.
- deleted 6y ago
  [deleted]
- pepy 6y ago
  why would you be more prudent when your failures will become a social cost while your successes will become a private profit? moral hazard through the roof
- listenallyall 6y ago
  >> The engines are starting again. The engines are always on, when prices/yields are allowed to appropriately reflect risk, without interference or intervention. One of the most important functions of an unobstructed free market is price discovery.
- alexpetralia 6y ago
  To play devil's advocate, how are companies over-leveraged during an environment of such low interest rates? Companies will optimize their capital structure for the lowest cost of capital, and if the cost of debt decreases, companies should rationally leverage accordingly. That's why we see Apple issuing $8B of debt (at ~135bps over 30 year Treasury bonds!) despite having over $200B of cash on hand. If your hurdle rate is 2.5%, surely your profitable business can return more to shareholders than that, so you should binge on this capital source? (Or even, as Apple claims it will do, distribute this directly to shareholders via buybacks & dividends.) Also, I would qualify your statement that people are not necessarily long the economy in the short-term, which is where credit markets have miraculously thawed; they're long the fact that they will undoubtedly be able to get credit from yet someone else (namely, the lender of last resort).
  - gwd 6y ago
    GP said "leveraged and didn't have cash stockpiles". Your example of Apple may fit the first criteria, but not the second. And this is exactly why you should have a cash stockpile, either as a company or an individual: You can never tell when a random event will completely wipe out your earnings for 6 months. I'm no corporate financier, but I've certainly heard arguments in favor of borrowing money during times of low interest rates in order to have a cash stockpile. But borrowing to do stock bybacks when you don't have a stockpile is just skating further out onto thinner and thinner ice.
    - alexpetralia 6y ago
      Yes, I agree with you. I am sure shareholders saw piles of cash and demanded: "better in our pocket than yours." (Carl Icahn famously tried this with Apple.)
    - cat199 6y ago
      > But borrowing to do stock bybacks when you don't have a stockpile is just skating further out onto thinner and thinner ice. this also partly depends on your expectation on the availability to resell the stocks later on if desired
- dforrestwilson 6y ago
  Taxing interest on corporate debt should be a DNC agenda item.
  - sokoloff 6y ago
    Why? In general, the US taxes income/profits and IMO debt is a valid business expenses, just like payroll, rent, and utilities. Are you arguing we should tax all of that as well? Or just one specific type of expense?
  - PeterisP 6y ago
    If you're lending money for interest, then the interest is taxable income just as any other revenue. What do you propose should be changed?
    - IgorPartola 6y ago
      You are misunderstanding. The GP is not talking about you lending money, but about you borrowing it. As it stands if you borrow $1m and pay $50k in interest as you pay back the loan, that $50k is considered a business expense and reduces your tax liability.
      - PeterisP 6y ago
        Yes, and why shouldn't it be so? Off the top of my head, two simple arguments why excluding interest from business expenses does not make sense, there probably are a bunch more: 1. Double taxation - if I my operating profit is $100 but I pay all $100 in interest, then that $100 gets taxed twice; when I receive it and when the lender receives it. Such double taxation is bad because it arbitrarily changes depending on where you put the "legal entity boundary" - if the "earner" and "lender" were a single entity, then they would pay much less taxes; so such a double taxation regime would result in large financial incentives towards vertical integration of conglomerates and artificially punish fragmented businesses, which is generally opposite from what we'd want to facilitate. 2. Introducing asymmetry between owning and renting assets. Rent is considered a business expense (if the proposal wants to change that as well, then it's a much bigger change with other considerations), so any current scenario where a company is borrowing money and using it to buy capital assets (buildings/cars/land/machinery/whatever) can be replaced with an equivalent deal where the "lender" is buying the assets and leasing them. If interest does not reduce taxable income but rent does, then a huge portion of commercial credit would be restructured overnight to leasing for an arbitrary artificial reason, so you would not really gain that much extra tax revenue but would introduce all kinds of bad economic incentives (it's generally better for all the business domain-specific assets such as custom machinery to be on the balance sheets of the companies where they're useful, not belonging to generic lenders, especially in various economic crisis situations) for no good reason. If you want to tax companies more, just raise the tax rate. Adding various artificial rule differences just adds complexity and all kinds of perverse incentives to structure transactions in weird ways so that they fit the arbitrary distinctions created by these rules. Saying "today, interest is a special kind of expense that's taxed more" is effectively a subsidy to law and accounting firms to restructure all the corporations so that they do the same business without having transactions that technically are "interest". Case in point, Islamic banking system where interest is prohibited as such - lenders still earn the same money from lending (e.g. Murabahah gets you almost the same end situation as "normal" western loans), it just has to be structured in complicated ways.
- bluGill 6y ago
  That depends, more prudent companies will have cash on hand (and good credit to borrow more) to buy the less prudent companies at fire sale prices. A bailout rewards the less prudent companies at the expense of the more prudent ones who cannot take advantage of their junk competition.
- snarf21 6y ago
  Nah, the Fed will bail them out. They are already holding a lot of corporate bond indexes and more will follow. We have a system now where companies were borrowing money at 0% to do buybacks to keep executive compensation rolling. This is one change that must happen. C-suite, VPs and board members should not be allowed to receive compensation based on stock price. It creates a perverse incentive. They should be building strong companies that allow them to stay employed. Give them bonuses based on growth or profits or whatever, just not stock price.
deleted 6y ago
[deleted]
m3nu 6y ago
Looks like we're setting ourselves up for a junk bond bubble down the road.
- phyalow 6y ago
  Central banks will just buy them onto their balance sheets. Its already begun: https://ftalphaville.ft.com/2020/04/30/1588254981000/How-should-the-Fed-buy-junk-bonds-/ https://ftalphaville.ft.com/2020/04/30/1588254981000/How-sho... https://www.afr.com/markets/debt-markets/why-the-rba-is-lending-against-corporate-bonds-20200505-p54q2v https://www.afr.com/markets/debt-markets/why-the-rba-is-lend...
  - nerbert 6y ago
    This is really worrying. There is no central bank of central bank, so this really is the last lifeline. The system has been pushed to its limit.
    - deleted 6y ago
      [deleted]
    - zhte415 6y ago
      A central bank is the lender of last resort. Bank of International Settlements is the central bank of central banks. https://en.wikipedia.org/wiki/Bank_for_International_Settlements https://en.wikipedia.org/wiki/Bank_for_International_Settlem...
- wcoenen 6y ago
  High bond yields mean low bond prices, so this is more like a crash than a bubble. The bubble of low bond yields might be popping.
alecco 6y ago
This is unsustainable debt levels. It's like living on credit cards. These companies and countries should be downsizing.
- pjc50 6y ago
  At the moment? Downsizing employers in the emergency will likely wreck the recovery, and you can't "downsize" a country without a body count.
  - erikig 6y ago
    For an example of that see: 1929 & Money Supply Reduction.
sokoloff 6y ago
In the 80s, we were borrowing money for mortgages (secured by houses with tenants and 20% downpayments) at rates over 15%. I don’t find yields over 10% given the current economic climate to be unreasonable or evidence of “desperation” on the part of sellers. I would probably find rates of under 10% as evidence of desperation on the part of buyers...
- bald 6y ago
  In order to draw a conclusion, we should look at the _real_ interest rate vs. the nominal one.
  - freejulian85 6y ago
    If you calculate inflation using the same method they used in the 80s, inflation is currently just as high.
  - snidane 6y ago
    Real interest rate depends on inflation which is an invented phenomenon of the 20th century. Inflation wasn't relevant in the preceding century and might not be relevant in 21st century either. At least not in the current form it is measure as a CPI while ignoring asset price inflation in real estate and stock markets. Whether that is a bug or feature remains to be seen, but for most people a psychological effect of large inflation has been present at least since the last big ceisia in 2008. Banks keep flooding the economy with new QE money and asset prices and rent payments keep increasing. Many people are not able to afford housing and birth rates plummet for not being able to have stability necessary to raise a family. Whether somebody adds a patch to the inflation theory such as the concept of Biflation (inflation in asset prices, deflation in cheap goods manufactured by robots and imported from China at the same time) or throws thr concept of inflation out of the window completely is the question for economists for this century.
    - mrep 6y ago
      > while ignoring asset price inflation in real estate and stock markets. Do you have any data to back this up? Some quick math shows annualized S&P 500 Return with dividends reinvested from april 2010 to april 2020 are 9.694% [0] which is entirely in line with historical returns [1]. Housing price per square foot hasn't really changed for most people either [2]. [0]: https://dqydj.com/sp-500-return-calculator/ https://dqydj.com/sp-500-return-calculator/ [1]: https://en.wikipedia.org/wiki/S%26P_500_Index#Performance https://en.wikipedia.org/wiki/S%26P_500_Index#Performance [2]: https://www.supermoney.com/inflation-adjusted-home-prices/ https://www.supermoney.com/inflation-adjusted-home-prices/
rfreytag 6y ago
https://archive.is/skzZQ https://archive.is/skzZQ
BlackVanilla 6y ago
Can anybody who understands better than me explain how this links to central banks' quantitative easing policies and the big macroeconomic picture?
- marticode 6y ago
  It doesn't directly. The central banks have lowered "safe rates" down to zero and sometimes below, but desperate businesses still have to offer high yields over 10% to find willing lenders.
drumhead 6y ago
Is this a buy signal for some of these travel or travel related companies I wonder? I can see them having a issue with cashflow now, but its not always going to be like this, people will need rental cars, maybe not as many, but they will need them. Potential consolidation first to reduce capacity and then price rises.
jl2718 6y ago
Anybody know how usury laws apply to bonds, especially for sole prop/partnerships or personally-secured debt?
jeffdavis 6y ago
Curious how all of these crazy interest movements will affect the housing market. Deflation sounds bad for housing values, but then again, it means interest rates will stay low, propping up values. And then there's the generally-crazy bay area market.

76 points by SREinSF 6y ago

Companies were over-leveraged and didn't have cash stockpiles. They're trying to get liquid cash so they don't have to divest of assets in a market that isn't buying or go into chapter 11. All the same, people are willing to extend loans because they are long on the economy, recovery, and return to normalcy. The engines are starting again. The biggest issue was that companies were over-leveraged with debt. Maybe we'll learn a lesson from this, although I suspect opportunity cost will prevent many from being more prudent.

remarkEon 6y ago
>I suspect opportunity cost will prevent many from being more prudent. I suspect people will not evolve to be more prudent unless there are some regulatory changes.
- marvin 6y ago
  Bankruptcies or stock offerings at crisis prices would help too. For instance, the airline Norwegian just accepted 95% dilution of existing shareholders in order to qualify for a government emergency loan. If they'd refused this, they would have gone bankrupt. Some shareholders were expecting a government bailout, and got a real beating. They're going to think twice about expecting a government bailout the next time.
  - remarkEon 6y ago
    I don't know that I see 95% dilution as totally reasonable terms for a bailout (though I know absolutely nothing about the details of that example), but making it clear that bailouts come with a cost seems like a good development ... so good on the Norwegian government for doing that.
    - marvin 6y ago
      Why do you consider that unreasonable, when the free-market option is bankruptcy? They got to keep 5%, rather than 0! The terms of the emergency loan was a certain debt:equity ratio, so in order to qualify, their very high debt load had to be reduced. This could be accomplished in any way the company desired, and it turned out that the only viable pathway was to allow bondholders to convert their loans to new shares at a favorable price. This led to a 95% dilution for existing shareholders. If they hadn’t done this, proper bankruptcy would have been the next step.
      - zdkl 6y ago
        I wonder why this mechanism (converting potentially derelict bonds into equity) isn't more widespread. In cases where the underlying company reasonably could be expected to continue operating were its debt ratio lowered, apart from legitimate resistance of bondholders expecting debt+interest payments why wouldn't this outcome be preferred to bankruptcy?
        kgwgk 6y ago
        This is actually one of the possible outcomes of bankruptcy. The business may be liquidated but it's not the only option. There may be a restructuring and creditors may become the new shareholders after the orginal shareholders are (in most cases) wiped out.
        marvin 6y ago
        Perfectly agree that this is preferable to bankruptcy. I might have worded myself ambiguously -- the emergency government loan might be a sort of bailout, but it wasn't a gift to the shareholders. When I hear bailout, I normally expect the latter. The government is expecting the loan to be repaid, and to make that expectation likely, they're requiring the company to use market mechanisms to strengthen its balance sheet. The result in this case is that existing shareholders are practically wiped out. In the case of Norwegian, this is pretty clear-cut. They've been on the verge of bankruptcy before, and their losses now are mostly due to foreign routes shutting down. Even if you accept the somewhat dubious rhetoric that compensation is mandated when losses are partly due to government involvement, it doesn't apply to this case. There was no way they could service their debt during the Covid crisis. Some sharehoders were expecting the government to give an unconditional loan to be defaulted on later, or participate in a stock offering at prices high enough to preserve their ownership percentage. This is an unequivocal message to shareholders not to expect that sort of rescue operation in the future. Run your company with a debt ratio that will let you survive unexpected hardships, or accept the risk of facing such hardships on your own.
Traster 6y ago
Don't these yields suggest that people actually aren't willing to extend the loans which is why the yields are spiking. Double digit yields in a deflationary economy should indicate that these loans are being made with a high expectation of default.
- C1sc0cat 6y ago
  I am surprised the Avis has to goto the junk bond market - the cruise line I can sort of get
  - pm90 6y ago
    The rental car market is strongly tied to the travel (both business and leisure) which has crashed. Why would it be surprising if a rental car company is in financial trouble?
  - lmm 6y ago
    I'd assume most of their business is renting to people who've just flown somewhere, and right now hardly anyone is doing that.
    - C1sc0cat 6y ago
      Ah true - though I wonder if their balance sheet wasn't that good to start with.
  - MR4D 6y ago
    Hertz is on the verge of bankruptcy so it only follows that the risk premium for Avis is high. Just think - if nobody is flying, who is renting all those cars?
    - TheAdamist 6y ago
      No one, they dont even have enough parking for them to all be idle simultaneously. The airport rental agencies near me have been renting out all the stadium parking nearby to use as overflow storage.
deleted 6y ago
[deleted]
pepy 6y ago
why would you be more prudent when your failures will become a social cost while your successes will become a private profit? moral hazard through the roof
listenallyall 6y ago
>> The engines are starting again. The engines are always on, when prices/yields are allowed to appropriately reflect risk, without interference or intervention. One of the most important functions of an unobstructed free market is price discovery.
alexpetralia 6y ago
To play devil's advocate, how are companies over-leveraged during an environment of such low interest rates? Companies will optimize their capital structure for the lowest cost of capital, and if the cost of debt decreases, companies should rationally leverage accordingly. That's why we see Apple issuing $8B of debt (at ~135bps over 30 year Treasury bonds!) despite having over $200B of cash on hand. If your hurdle rate is 2.5%, surely your profitable business can return more to shareholders than that, so you should binge on this capital source? (Or even, as Apple claims it will do, distribute this directly to shareholders via buybacks & dividends.) Also, I would qualify your statement that people are not necessarily long the economy in the short-term, which is where credit markets have miraculously thawed; they're long the fact that they will undoubtedly be able to get credit from yet someone else (namely, the lender of last resort).
- gwd 6y ago
  GP said "leveraged and didn't have cash stockpiles". Your example of Apple may fit the first criteria, but not the second. And this is exactly why you should have a cash stockpile, either as a company or an individual: You can never tell when a random event will completely wipe out your earnings for 6 months. I'm no corporate financier, but I've certainly heard arguments in favor of borrowing money during times of low interest rates in order to have a cash stockpile. But borrowing to do stock bybacks when you don't have a stockpile is just skating further out onto thinner and thinner ice.
  - alexpetralia 6y ago
    Yes, I agree with you. I am sure shareholders saw piles of cash and demanded: "better in our pocket than yours." (Carl Icahn famously tried this with Apple.)
  - cat199 6y ago
    > But borrowing to do stock bybacks when you don't have a stockpile is just skating further out onto thinner and thinner ice. this also partly depends on your expectation on the availability to resell the stocks later on if desired
dforrestwilson 6y ago
Taxing interest on corporate debt should be a DNC agenda item.
- sokoloff 6y ago
  Why? In general, the US taxes income/profits and IMO debt is a valid business expenses, just like payroll, rent, and utilities. Are you arguing we should tax all of that as well? Or just one specific type of expense?
- PeterisP 6y ago
  If you're lending money for interest, then the interest is taxable income just as any other revenue. What do you propose should be changed?
  - IgorPartola 6y ago
    You are misunderstanding. The GP is not talking about you lending money, but about you borrowing it. As it stands if you borrow $1m and pay $50k in interest as you pay back the loan, that $50k is considered a business expense and reduces your tax liability.
    - PeterisP 6y ago
      Yes, and why shouldn't it be so? Off the top of my head, two simple arguments why excluding interest from business expenses does not make sense, there probably are a bunch more: 1. Double taxation - if I my operating profit is $100 but I pay all $100 in interest, then that $100 gets taxed twice; when I receive it and when the lender receives it. Such double taxation is bad because it arbitrarily changes depending on where you put the "legal entity boundary" - if the "earner" and "lender" were a single entity, then they would pay much less taxes; so such a double taxation regime would result in large financial incentives towards vertical integration of conglomerates and artificially punish fragmented businesses, which is generally opposite from what we'd want to facilitate. 2. Introducing asymmetry between owning and renting assets. Rent is considered a business expense (if the proposal wants to change that as well, then it's a much bigger change with other considerations), so any current scenario where a company is borrowing money and using it to buy capital assets (buildings/cars/land/machinery/whatever) can be replaced with an equivalent deal where the "lender" is buying the assets and leasing them. If interest does not reduce taxable income but rent does, then a huge portion of commercial credit would be restructured overnight to leasing for an arbitrary artificial reason, so you would not really gain that much extra tax revenue but would introduce all kinds of bad economic incentives (it's generally better for all the business domain-specific assets such as custom machinery to be on the balance sheets of the companies where they're useful, not belonging to generic lenders, especially in various economic crisis situations) for no good reason. If you want to tax companies more, just raise the tax rate. Adding various artificial rule differences just adds complexity and all kinds of perverse incentives to structure transactions in weird ways so that they fit the arbitrary distinctions created by these rules. Saying "today, interest is a special kind of expense that's taxed more" is effectively a subsidy to law and accounting firms to restructure all the corporations so that they do the same business without having transactions that technically are "interest". Case in point, Islamic banking system where interest is prohibited as such - lenders still earn the same money from lending (e.g. Murabahah gets you almost the same end situation as "normal" western loans), it just has to be structured in complicated ways.
bluGill 6y ago
That depends, more prudent companies will have cash on hand (and good credit to borrow more) to buy the less prudent companies at fire sale prices. A bailout rewards the less prudent companies at the expense of the more prudent ones who cannot take advantage of their junk competition.
snarf21 6y ago
Nah, the Fed will bail them out. They are already holding a lot of corporate bond indexes and more will follow. We have a system now where companies were borrowing money at 0% to do buybacks to keep executive compensation rolling. This is one change that must happen. C-suite, VPs and board members should not be allowed to receive compensation based on stock price. It creates a perverse incentive. They should be building strong companies that allow them to stay employed. Give them bonuses based on growth or profits or whatever, just not stock price.

deleted 6y ago

[deleted]

m3nu 6y ago

Looks like we're setting ourselves up for a junk bond bubble down the road.

phyalow 6y ago
Central banks will just buy them onto their balance sheets. Its already begun: https://ftalphaville.ft.com/2020/04/30/1588254981000/How-should-the-Fed-buy-junk-bonds-/ https://ftalphaville.ft.com/2020/04/30/1588254981000/How-sho... https://www.afr.com/markets/debt-markets/why-the-rba-is-lending-against-corporate-bonds-20200505-p54q2v https://www.afr.com/markets/debt-markets/why-the-rba-is-lend...
- nerbert 6y ago
  This is really worrying. There is no central bank of central bank, so this really is the last lifeline. The system has been pushed to its limit.
  - deleted 6y ago
    [deleted]
  - zhte415 6y ago
    A central bank is the lender of last resort. Bank of International Settlements is the central bank of central banks. https://en.wikipedia.org/wiki/Bank_for_International_Settlements https://en.wikipedia.org/wiki/Bank_for_International_Settlem...
wcoenen 6y ago
High bond yields mean low bond prices, so this is more like a crash than a bubble. The bubble of low bond yields might be popping.

alecco 6y ago

This is unsustainable debt levels. It's like living on credit cards. These companies and countries should be downsizing.

pjc50 6y ago
At the moment? Downsizing employers in the emergency will likely wreck the recovery, and you can't "downsize" a country without a body count.
- erikig 6y ago
  For an example of that see: 1929 & Money Supply Reduction.

sokoloff 6y ago

In the 80s, we were borrowing money for mortgages (secured by houses with tenants and 20% downpayments) at rates over 15%. I don’t find yields over 10% given the current economic climate to be unreasonable or evidence of “desperation” on the part of sellers. I would probably find rates of under 10% as evidence of desperation on the part of buyers...

bald 6y ago
In order to draw a conclusion, we should look at the _real_ interest rate vs. the nominal one.
- freejulian85 6y ago
  If you calculate inflation using the same method they used in the 80s, inflation is currently just as high.
- snidane 6y ago
  Real interest rate depends on inflation which is an invented phenomenon of the 20th century. Inflation wasn't relevant in the preceding century and might not be relevant in 21st century either. At least not in the current form it is measure as a CPI while ignoring asset price inflation in real estate and stock markets. Whether that is a bug or feature remains to be seen, but for most people a psychological effect of large inflation has been present at least since the last big ceisia in 2008. Banks keep flooding the economy with new QE money and asset prices and rent payments keep increasing. Many people are not able to afford housing and birth rates plummet for not being able to have stability necessary to raise a family. Whether somebody adds a patch to the inflation theory such as the concept of Biflation (inflation in asset prices, deflation in cheap goods manufactured by robots and imported from China at the same time) or throws thr concept of inflation out of the window completely is the question for economists for this century.
  - mrep 6y ago
    > while ignoring asset price inflation in real estate and stock markets. Do you have any data to back this up? Some quick math shows annualized S&P 500 Return with dividends reinvested from april 2010 to april 2020 are 9.694% [0] which is entirely in line with historical returns [1]. Housing price per square foot hasn't really changed for most people either [2]. [0]: https://dqydj.com/sp-500-return-calculator/ https://dqydj.com/sp-500-return-calculator/ [1]: https://en.wikipedia.org/wiki/S%26P_500_Index#Performance https://en.wikipedia.org/wiki/S%26P_500_Index#Performance [2]: https://www.supermoney.com/inflation-adjusted-home-prices/ https://www.supermoney.com/inflation-adjusted-home-prices/

rfreytag 6y ago

https://archive.is/skzZQ https://archive.is/skzZQ

BlackVanilla 6y ago

Can anybody who understands better than me explain how this links to central banks' quantitative easing policies and the big macroeconomic picture?

marticode 6y ago
It doesn't directly. The central banks have lowered "safe rates" down to zero and sometimes below, but desperate businesses still have to offer high yields over 10% to find willing lenders.

drumhead 6y ago

Is this a buy signal for some of these travel or travel related companies I wonder? I can see them having a issue with cashflow now, but its not always going to be like this, people will need rental cars, maybe not as many, but they will need them. Potential consolidation first to reduce capacity and then price rises.

jl2718 6y ago

Anybody know how usury laws apply to bonds, especially for sole prop/partnerships or personally-secured debt?

jeffdavis 6y ago

Curious how all of these crazy interest movements will affect the housing market. Deflation sounds bad for housing values, but then again, it means interest rates will stay low, propping up values. And then there's the generally-crazy bay area market.