Updated: Apr 15
A consensus is building that despite continued growth in the economy, a black swan is lurking around the corner that could potentially drive the inevitable economic downturn. We are currently in an abnormally long positive economic cycle that has largely been built from low interest rates spurring companies to load up their balance sheets with cheap debt for stock buybacks and leveraged buyouts.
However, as interest rates begin to rise, more firms may struggle with debt service and cash flow strains, and with the new tax reform policy, many firms will have limits on their interest deductibility. Over the course of the year, as more firms surface that are unable to address the challenges, the debt market could begin to freeze up and create a cascading liquidity crunch.
What's equally interesting to consider is a commonality surrounding the industries that the ever-ubiquitous Amazon disrupts. The industries are often made up of companies with over-leveraged balance sheets - think recent retail, grocery and media bankruptcies. Lack of financial mobility from drowning debt will invariably strangle efforts to develop strategic and competitive business models.