By Haddon Libby
Corporate bankruptcies are at the highest level since the 2020 pandemic. According to S&P Global Market Intelligence, there were 459 bankruptcy filings through the end of August, nearly twice as many as last year’s 235. During the 2020 pandemic, 466 companies filed. We must go back to 2010 to find a period with more corporate bankruptcies.
Because of the easy money policies for 2020 and 2021, many companies were able to survive despite weakening financials and losses. Low interest rates and a stock and bond market awash in cash buoyed many companies that would have otherwise failed. With the cost of money up 5% over the last two years, inflation, and higher labor costs, struggling companies are unable to survive so many challenges.
A few of the more notable failures this year include Silicon Valley Bank, trucking company Yellow and Bed, Bath & Beyond. In August, Proterra, the highly touted electric bus and truck company, filed for bankruptcy protection.
In general, companies reliant on cyclical consumer goods have had the hardest time this year. Healthcare has also been struck by several hospitals going bankrupt.
Envision Healthcare once boasted 29 million patient visits via one of its 830 locations as well as 17,000 physicians. The company blamed its demise on a sharp drop in patient visits post-COVID, a shortage of clinicians and denied or delayed payments from insurance companies.
Long rumored to be near its end, news reports have it that Rite Aid is preparing for its bankruptcy. The settlement costs for the company’s role in the opioid crisis is the financial straw that is likely to break its already debt-heavy back.
Jim Chanos operates a hedge fund that is known for shorting the stocks of overvalued or failing companies. A person who shorts a stock makes money when the price goes down and loses money when prices rise. Chanos believes that “3% to 4%” of public companies will fail over the next few years for many of the same reasons as the companies who have already failed. He does not see this as abnormal but part of the business cycle. He believes that the anomaly was over the last few years due to ultra-low rates and easy money policies from the Central Banks of the world.
Chanos discussed the “tetonic shifts” that generative A.I. or ChatGPT could have on business on Bloomberg Radio. Chanos used an anecdote related to IBM and its CEO Arvind Krisha. Chanos shared that he was listening to an interview where Krisha was touting the cost savings of generative A.I. at IBM. Krisna thought that A.I. could take the place of many engineers leading to far lower costs with rising profits. Chanos wondered what would happen to IBM when its largest clients decided that generative A.I. could be used to create in-house solutions that reduce the need for IBM. Could IBM face the same fate as those terminated engineers?
Generative A.I. is a tetonic shift that will change life as we know it as it matures. An early version creates A.I. newscasters in India. As India has 122 major languages and nearly 1,600 other languages, the need to have broadcasts translated into so many languages drove the need for an A.I. newscaster.
Now and forever, some of today’s most successful companies will become tomorrow’s has-beens. Blockbuster was one of the ten most valuable companies in the United States before Netflix came on the scene. Once highly profitable, local newspapers, radio and television stations struggle to survive as consumers switch to tablets, Spotify, and streaming. Where commercial real estate was once considered one of the safer and more profitable real estate investments, the shift to work from home has many property owners and banks alike feeling nervous about vacancy rates and falling rents.
As all of this shows, the one constant is that things change. You can either embrace change and use it to your advantage, fight it and struggle or ignore it and be left behind.
Haddon Libby is the Founder and Chief Investment Officer of Winslow Drake Investment Management. For more information, please visit www.WinslowDrake.com.