The economy is at risk.

Hey guys.

A friend of mine, a bankruptcy lawyer who represents gigantic corporations (mostly large banks) in Manhattan, reiterated that “everyone” (Manhattan bankruptcy practice law firm partners, institutional bankers, et al.) expects there to be mass corporate bankruptcies in 2023. Since this will affect the market, I asked him to explain.

He said that generally, companies don't fund their operations from the profit that they make. They borrowed vast sums to expand, when interest rates were effectively zero, and just used their cash flow from operations to fund short-term expenses, including interest on those massive loans. Now, there are two problems:

1. Those loans are going to come due in 2023, but the companies, which hadn't anticipated the pandemic or that business conditions would change much, have to come up with a huge amount of money to pay their creditors, but can't, which will force them into bankruptcy; and
2. They have no way of refinancing the loans because credit just isn't available. To put this into terms that we can understand: Imagine that you have $1,000.00 of debt on a credit card, and want to refinance it by moving it onto another credit card, but that other credit card company will only let you move $500.00 over. The same thing is happening with these corporations that are going to go bankrupt. Their problem is that even if they could refinance to give themselves more time, they'd have to pay a lot more in interest, even if they could move their entire debt over, and they just don't have the money to pay those new and insane interest payments.

He also said that in 2024, if not earlier, a huge amount of money will go into BA, LMT, RTX, et al., as European countries that had donated their guns, missiles, and other weapons to Ukraine pay our companies to restock the depleted supplies. The US government will need to do the same, since we're throwing nearly everything into Ukraine that we've got.

(At some point, when the Ukraine war ends, don't forget that a huge amount of concrete, steel, and glass will be sold to Ukraine to rebuild, so identifying the best companies ideally suited to do that might be a good investment strategy, although the timing might be difficult to predict.)

In any case, when these corporate bankruptcies occur, debt gets “restructured.” The problem, however, is that you can't restructure debt if you can't get any credit, so no one in the legal system that deals with banks and corporations in bankruptcy has any idea how all of this is supposed to get resolved. I glean from this that 2023 is going to be a mess.

If corporate earnings drop, which is a logical conclusion based on what the Fed is doing to combat inflation and the guidance given by many corporations that have reported Q3 earnings, then even more corporations that are teetering on the financial edge will be pushed into bankruptcy.

Overall, I believe that SPY will drop by 10.00% to 20.00% by Thanksgiving 2023. Please take all due precautions. Do not buy unprofitable companies, don't chase off relief rallies, and continue DCA'ing into any long-term positions that you're interested in establishing.

Will 2023 be a good year? A: No.