Well folks. Goldman Sachs Thinks there could be a wave of defaults coming and the defaults are not going to Peak this quarter. they're not going to Peak next quarter, but instead they're going to Peak in the first half of 2024, which is actually where there's some alignment of current recessionary expectations, which is not great news. Let's take a look at this and see if there's some things that we should really be concerned about.

This is the Goldman Sachs Global Credit Trader Research: Uh, what we have are a peak mid-year but no. Spike Uh, okay. Interesting. We expect the 12 month trailing us default rates to peak in the first half of 2024 at 4.6 and 6.7 percent for high yield and leveraged loan issuers.

Those are kind of like think about like your cruise lines where you know when they're borrowing, they're borrowing at like 13 or whatever in Europe The default trend has been more benign than in the Us, but we do expect the pace of defaults to modestly increase in the first half. Uh, and so this is leading a lot of people to be very concerned that oh my gosh, you know that's how it starts. You know you start getting some defaults when you start getting defaults. What ends up happening? Well, you end up getting job loss that leads to less earnings for big companies, and then they have to lay off people.

And that's how you get a recession. That's definitely possible. But fortunately, these Peaks do not seem that dramatically high and it makes sense. In fact, last week we covered a story where we analyzed the net interest payments by Market Cap and we found that net interest payments for Mega cap companies and large cap companies were actually declining.

That is the amount of money companies we're spending on interest was going down. Not up. People Like, how is that possible? Well, it's possible, because what they're doing is they're borrowing along and they're depositing short. So they borrow for a 10, 20-year period.

They take that money like an Apple. They borrow at say four percent. They deposit it into a money market getting 5.5 They win. They profit the difference, whereas smaller riskier companies are getting screwed.

smaller riskier companies like Cruise Lines or even small caps. Like, maybe even a matterport. they're having to pay substantially higher interest rates. They're not able to borrow at those lower rates, and that increases the default risk for for these sorts of companies substantially.

Since the start of 2021, there's been a total of 266 billion of rising stars in the USD Market just more than reversed the 230 billion dollar coveted wave of Fallen Angels. That said, only 112 billion of the 230 billion downgraded in 2020 has migrated back to growth, suggesting a robust pipeline coming up. Okay, fine. refinancing.

What do we got here? Compression: Cash Cash Availability Fine. Let's skip some of this. All right. How large? How constantly the share of U.S the US dollar denominated high-yield bonds maturing within the next 12 months has nearly doubled.

That increases interest expenses for companies with the higher borrowing costs that we just talked about. So in other words, the amount of companies that are like, oh no, we have to refinance. In other words, bonds are coming due. We issue new bonds at higher rates.

replace the old ones has increased double twofold. Uh, nearly. Uh, for the next 24 months Increases the risk of more defaults. That's how they're increasing getting to this higher level of defaults expected.

Here's a chart by the way of the defaults they're expecting and how you can kind of compare them to previous levels. So, we've got sort of a peak drawn here for the high yield bond market. These defaults would be somewhat similar to what we saw in like 2012. Nowhere near the defaults expected of what we saw in 08.

So a six percent level of default shows you that this isn't like a recession level of defaults it would. There'll be an increase in default, and this default level is still ramping up. We're not in that down ramping phase. We actually had more defaults in Covid, more defaults in 2016, and again, this would just be similar to about 2002 12 of the failure of companies.

Well, quite interesting. So a few weeks ago Goldman updated their 2023 full year. Whoops. Uh.

issuer weighted defaults forecast to 3, 8 and 6.5 in the leveraged loan. Market Again, those numbers go up for 2024 to 4.6 and 6.7 percent. We then expect a decline that will push the full year default rate back to three and a half percent in high yield and five two in leverage for both markets. Our U.S Economists soft Landing Baseline view greatly limits the risk of defaults.

In other words, though, if we don't get a soft Landing these numbers could all be a lot worse. Assuming the FED delivers only three 25 basis point cuts, the U.S Uh, that. U.S Economists currently expect funding costs for floating rate borrowers simply will not come down far enough or fast enough for some of the pressured issuers to alleviate financial distress. Okay, in American, they're basically saying Even If the Fed starts cutting rates next year.

It's going to be way too slow for you to actually avoid default. you're still going to have to refinance at substantially higher levels, you're still going to get absolutely whacked in your net interest expenses, and it's going to be a problem that's going to lead to defaults. But those defaults thanks to the soft Landing narrative aren't expected to be that great. So is this like ridiculously bearish No.

Is it good? Um, that's debatable. Some people say that a lot of these companies are zombie companies that have more debt expense than they have free cash flow, and they deserve to go bankrupt. And to some extent, that's capitalism. If you have a bad product, you go out of business, you stop innovating, You go out of business, look new burst Pro Tangent: We talk about this and the uh, how to make more money and get sh9t done faster course featuring AI course expiration this Friday By the way, on the 15th, we talk about these sort of things, but every business goes through.

Cycles And if you were a business owner or you're even just an employee, if you're not constantly thinking about what can I do to stay ahead of my competition, Next, you will get replaced. There's a line out the door of people ready to take your job and that shouldn't be depressing. It should be motivating. It should motivate you to stay ahead of your competition.

Are you working harder? Are you working smarter? And when the answer to those questions is yes and yes, then you get paid more now. I Know then you get sort of the pessimists that are like, well, I've been, you know I've tried to start working harder and I haven't gotten paid more yet. Well, then you're either at the wrong job or you're being too impatient. It's a combination probably.

But the point is, if you're not constantly innovating, you lose. and businesses that fail to innovate deserve to die. That's capitalism. That's how we make sure we don't get scams like, uh, home builders in China building skyscrapers that are built so poorly that they basically need to be demolished later because the companies are just taking government subsidies and grants and stimulus building trash properties to get more money and building them faster to get more money faster.

And then they end up having a crop product. That's how you create fraud and froth. Real capitalism prevents that because the capitalist knows that the buyer is not going to buy a trash property. If your property's trash, it won't sell.

Then you go to business because you can't sell your product and the Builder who actually has a better reputation is able to sell their properties And so that Builder gets more business and those properties sell for more money, Capitalism weeds out this kind of stuff. So anyway, uh, this is probably a good thing. uh I Do think it's very interesting to kind of see the this, this increasing level of defaults and uh and and how it looks historically. uh I think this is actually optimistic so it's a good thing.

Another thing that's a good thing is you have four days left to check out that coupon code at Building Wealth Link down below. By the way, have I mentioned that when I Live stream and I make these videos I Bring them to you with the power of Stream Yard. This is a paid promotion, but go to Metcaven.com Stream Yard Learn more about how you can use professional broadcasting software so you don't actually have to install uh uh, you know stuff on your computer. You can do it all browser based through Google Chrome With Stream Yard, learn more about Stream Yard.

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