I revisited an interview with Harris Kupperman on Real Vision from
November. His comments on interest rates
were not news (if you have been paying attention), but his delivery did a good job
of succinctly clarifying the risk:
“I think the number one
big-picture view right now is interest rates. If you look around the world,
every currency, every yield curve, every duration component, they're all
breaking out. There's a 30-year chart in the US it just broke out of. You look
at shorter term charts, there are basically inverse head and shoulders
everywhere. It's all breaking out.
And when you have so many
different breakouts at the same time, it's probably a trend change. Interest
rates go in generational cycles, 30-year cycles, and we just ended a 30-year
cycle. No one in the markets right now, or almost no one, has invested during a
time when rates go up. They've only seen rates go down.
I think you're going to see a
huge change in what's happening in the markets. When rates go up, the value of
everything else, every asset goes down because it's all value on cash flows. At
the same time, cash flows go down because interest rate coverage goes up.
And I think you to see a loss
situation where companies today look conservatively leveraged at 100 and 200
basis points more interest rate will actually lead to them being highly leveraged
from a cash flow coverage side, that buybacks and dividends are going to end.
Debt pay down is going to begin. And I think you will see a lot situations
today where you have reasonably good businesses, where two, three years from
now, what's to be left is an equity sliver on the enterprise value and a huge
debt component…
I think it's a lot like the '70s
when rates go up and values keep going down. And increasingly cash flow goes to
interest service. And you're coming at this from such low interest rates that
you don't need interest rates to go to 10%, 15%. To move from 0 to 300 BPS
right now is an extreme. But you have interest rate floors in place, so you
haven't really seen it companies.
The move from 300 to 500 BPS, that's
going to go to stretch a lot of companies. And you don't really need the rates
to go up that much. And yes, I think it's going to be a dramatic repricing
because right now, equities price in the future, so equities are pricing in
future earnings growth often funded by buybacks. And suddenly they're going to be
pricing in earnings declines as everything goes to interest coverage. And when
that repricing happens, it's going to be very dramatic.”
