bearfund

Reverse Carry Trade Borrowing Proves Deadly

I don't understand why so many people are characterising lenders as "afraid to lend" or saying there's "no money available". The problem is that borrowers are either out of capacity to borrow or unwilling to offer a fair rate. In both cases, that is a sign not of malfunctioning credit markets but of a marginal business that has reached the end of its rope and needs to fold.

In a world that has enjoyed interest rates of much less than 5% for most of the past decade, most businesses are marginal. It's very easy to load up on debt that costs nothing and eke out a modest ROE, no matter how bad the business model or how poor the management. Now that money is being repriced toward reasonable levels those businesses will have to do one of: increase prices for their products, cut costs, improve their products, positioning, or model, accept a much lower return on equity, or fail. Most of them are beyond salvaging and need to fail.

This is why cheap money is the worst possible curse than can be placed on an economy. It is far better to let the market set rates and use sound money that does not distort the market by losing some large but arbitrary and hard to guess part of its value every year. As an example of this, I would be happy to lend gold to highly creditworthy companies at 12% for 10 years. But there are few such creditworthy companies and none willing to pay 12% on money that will not depreciate. They can't; it would eliminate all profits. So the deleveraging continues...