​Stage Managing the Debt Bubble and the Recession That Never Was

The biggest surprise coming out of the fed tightening is the failure to emerge of the highly anticipated recession. Below I argue that the economy has held up better than expected due, in part, to the "stage managing" of the debt bubble and this stage managing generally involves adding more debt to the system - curing a debt bubble with more debt:

1.    ​Consumer spending, has been sustained by borrowing more, drawing down savings and repaying debt more slowly.​

2.    Commercial Real Estate (CRE) borrowers are avoiding the day of reckoning by extending debt into 2024 and beyond. 2023 was a relatively benign year in CRE defaults since much of the debt scheduled to mature was extended into 2024 and beyond. This cannot continue forever.

3.    Private Equity and Debt ecosystem are keeping the wheels on the wagon through creative financial engineering: a) new debt types issued to support unsustainable debt - eg Net Asset Value (NAV) and Payment in Kind (PIK) loans, b) Private Equity General Partners using continuation funds to catapult overvalued investments into new funds thereby kicking the overvalued can to future investors, c) dividend recapitalizations wherein more debt is issued in order to pay dividends to investors.

4.    ​Ratings agencies (RAs) are provably slow in downgrading obviously troubled sectors like CLOs and CMBS. Failure to downgrade perpetuates the illusion that all is fine and keeps the new issue machine humming - generating more fees to the RAs.

​These are all undeniably happening. Can they collectively explain the absence of recession? Quite possibly. And the strong economy resulting from this stage managing, is leading to the dangerous higher-for-longer monetary policy. All in the hope that a Fed bailout emerges before the wheels fall off the wagon.