September 29, 2025 • 38 mins
Mike Armstrong and Paul Lane discuss why this week's most important data release is the jobs report. Rate cuts might not cure what ails the job market. Recession seems far off. The economy is also far from trouble. Why a small auto parts maker in the MidWest going bankrupt has massive ramifications.
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Episode Transcript
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Speaker 1 (00:00):
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(01:06):
and Paul Lane.
Speaker 2 (01:12):
Good morning, Happy Monday, Welcome back to the Financial Exchange.
It's Mike, Paul and Tucker with you on a busy
start to a week. Paul, We've got a lot of
data that is due to come out. We've got a
looming government shut down that we will be covering. Nobody
seems terribly concerned about that one, quite honestly. We have
(01:32):
a bunch of data about jobs coming out this week.
Tomorrow Willie will have a job openings survey. On Friday,
we get the monthly jobs report. On Thursday, we get
the weekly jobless claims, a little bit of home sales
data as well, and then finally we will also have
a few earnings coming out. At eleven AM today, we're
going to be discussing another story in quite honestly, it's
(01:57):
a story that's getting overlooked by most major news public
that I think could end up being one of the
biggest stories of the year when it comes to debt
markets and another blow up in the auto industry. But
we'll be covering that at eleven But I want to
start off with the week ahead and just kind of
where to focus because there is a lot coming out
this week. Just cover that schedule again. Pending home sales
(02:19):
just came out seven minutes ago, we'll cover that. Another
home data point tomorrow at nine am is the SMP
Case show Er Home Price Index. We have not seen
a dramatic drop in home prices nationally, but market by
market it's been a little bit interesting. At ten am
tomorrow the Job Openings Report. We do expect to see that.
One Consumer Confidence is also out at ten am, and
(02:42):
then at midnight tomorrow is when the government shutdown could
go into place here, So anything beyond that a little
bit of a question mark in terms of whether we
will get at ADP employment that's done by a private
payroll provider will get that data. Ism manufacturing same story
by a private organization, but other pieces around you know,
(03:03):
the jobless claims out on Thursday as well as I
don't know a factory who puts together the factory orders.
I'm guessing that's private industry as well. And then the
Friday Jobs report is done by the Bureau of Labor Statistics,
which will almost certainly be shut down the event of
a government shutdown, so I wouldn't expect to get that
if we do have this shutdown. But what are you
(03:23):
looking at, Paul that you know could move the narrative
here for the state of the economy, assuming we get
all these releases.
Speaker 3 (03:29):
To me, you'd be the jobs report.
Speaker 4 (03:31):
Obviously, the Federal Reserve has indicated that the labor market
is their biggest concern at the moment. That's why we
saw the most recent rate cut, and there could perhaps
be two more over the course of the end of
the year. So whatever data that we can gather from
Thursday and Friday's reports is really what is going to
be most significant. We had the initial jobless games for
(03:53):
last week come in lower than anticipated, so that was
lower meaning better better than anticipated, So that was certainly
a positive note. Yeah, exactly birdying there. But the week
prior to that, earlier in the month was rather abysmal.
But week to week these numbers can get kind of
noisy on that front. Of course, Friday's report is probably
(04:13):
the most significant of all this week, where we're anticipating
that we would see a fifty thousand increase to non
farm payrolls after a twenty two thousand gain in August.
For the last four months, we're averaging about twenty six
thousand jobs added.
Speaker 3 (04:28):
This is much less than.
Speaker 4 (04:30):
Where we were over the course of the last several years,
where one hundred and fifty thousand was kind of more
the number. So really that is the biggest focus for
me this week. Some of this other stuff is noise
that will definitely fall and keep an eye on, But
the labor market is really of utmost importance and any
data point that could perhaps push it one way or another
(04:51):
is what markets will be most focused on.
Speaker 2 (04:53):
Yeah, I think there's the other piece to the unemployment
rate that comes out on Friday is of key focus,
and you know that's all included in the same report,
But that unemployment rate is the one that the FED
has pointed at over and over to say, this is
more what we care about when we're trying to measure
the tightness or slack in the labor market. It has
slowly crept up from about four to one to four
(05:14):
to three over the last twelve months, but honestly, that's
not a big move and is I think the I
think that's the main item that's kind of holding more
FED governors back from buying into a full end and
full throatd support of more rate cuts down the road.
And so should you see that unemployment rate go down, which, again,
how could that happen when we're seeing such weak job
(05:36):
hiring numbers. Deportations and retirees a right, like, those are
the two main factors that I'm looking at that could
lower the unemployment rate. Would be more people leaving the
workforce because of deportations, more people retiring because baby boomers
are getting older. Now weigh that against a very weak
hiring market right now, employers that are just not pulling
(05:58):
the trigger on the new rules, whether because of AI,
uncertainty about tariffs or some other factor, they are just
not hiring at the pace that they were for the
last several years. And there you land the Fed in a,
you know, particularly difficult conundrum right now. We think we're
a little bit too aggressive in terms of our rates
right now. We don't know how much lower they need
(06:20):
to go. And that Job's report, I think is going
to be key to determining which direction that goes in.
Speaker 4 (06:25):
Yeah, I think it segues us into kind of that
discussion that the rate cuts perhaps they're not enough to
cure the job market. I mean, we have to see
what the job market looks like. As you were just
mentioning there and we were talking about what we'll see
from Friday's report, but what we've seen is, like I mentioned,
a quarter of a percent cut that occurred earlier this month,
and perhaps two more. But typically when you're lowering interest rates,
(06:49):
what that provides to the economy is a boost to
asset prices. So all of a sudden, you know, barring
costs are less or potentially risk free rates of return
are less than they once were, so that would boost
asset prices. But at the same point in time, it
doesn't necessarily trigger an expansion of hiring or anything of
(07:09):
that nature. It's good for people looking to buy house.
Potentially there's some trickle down effect on the interest rate
side of things and for borrowings, but not necessarily an
immediate impact to hiring.
Speaker 2 (07:19):
To be clear, if the labor market needs rescuing, needs saving,
the FED lowering rates has no ability to do that,
rights right, Like, the reason they're cutting rates is not
because they think the labor market needs rescuing. They're doing
it because they think they're maybe getting in the way
a little bit. They think that their policy is a
little bit restrictive for businesses, and so they're saying, hey,
(07:40):
we just need to normalize things so that we stay
out of the way of the economy and of businesses
trying to move forward with their plans. That is the
only thing that the FED is acknowledging here. But yeah,
I mean to your point. If the labor market ends
up in a free fall where unemployment is rising and
rising quickly, the FED really has no real ability to
rescue that on their own. They rely on Congress to
(08:01):
come up with different things, or they just allow for
the business cycle to go through what it needs to
go through, and the best they can do is get
out of the way.
Speaker 3 (08:07):
Right They only have so many tools at their disposal.
Speaker 4 (08:10):
This is one of them to try and stir up
more economic activity or like you said, maybe get out
of the way. But it's not a cure all necessarily.
And that's why we want to focus on the jobs
report in the labor market because it is it's significant
to the overall well being of the economy, and that's
what the FED focuses on too, and tries to do
its best to keep it afloat. But you know, it
(08:32):
doesn't have every tool it's disposal to cure all the ills.
Speaker 2 (08:36):
Let's take a quick break here when we come back.
I want to move on from the FED and the
job market and just talk about this economy and its
possibility of recession. It seems pretty far off. I know
that seems ludicrous to talk about when we're sitting at
four point three percent unemployment and the most reading on
most recent reading on GDP was three point eight percent.
(08:56):
But a few pieces about recession and what seems to
be holding it back at this stage. That's next on
the Financial Exchange.
Speaker 1 (09:04):
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Speaker 2 (09:59):
So two different pieces about the economy and where it stands,
and the conclusion of both of them seems to be that, yeah,
recession is seeming pretty far off, but a lot of
the potential reason for that is the spending among the wealthy.
And then drawing that further down, the spending from the
wealthy seems to be coming from a I don't want
(10:22):
to say inflated, but compared to a few years ago
inflated self assessment of their overall net worth. And that's
coming from a number of different areas, stocks, real estate, crypto,
just to name a few of them. But this is
the trend that has been playing out right. We have
a large swath of Americans who are struggling to make
(10:43):
ends meet. You're seeing that through all sorts of survey
data from credit card issuers, from auto loan issuers. Tricolor,
a relatively unknown company that mainly issued car loans to
subprime borrowers, went bank just a couple of weeks ago.
You're seeing cracks in the foundations for that demo. The
(11:06):
other story is that the top ten percent of income
earners now account for half of total consumer spending. And yeah,
subprime auto loan, you know, doesn't seem to matter to
them whatsoever. They keep on spending, going on vacation and
driving this economy forward. So I guess the question is
(11:27):
is that uniquely different than other times in history and
is it something to actually be concerned about? Is the
very difficult question to answer.
Speaker 3 (11:35):
Yeah, that's statistic. Obviously, we've talked about it a lot.
Speaker 4 (11:38):
Half of the consumer spending, you know, consolidated between that
top ten percent of income earners. But it's always been
relatively high, Like if you look back over the last decade,
so it's been forty percent and it's grown. But to
your point, you know, perhaps is it different, It's more
than it was before. I do just have this underlying
(11:59):
suspicion and I wish that there could perhaps be more
data on this.
Speaker 3 (12:02):
It's just it does feel like because.
Speaker 4 (12:05):
You're accounting for so much spending from those people who
are likely pretty heavily invested in the stock market and
have a lot of investment savings, that because the market
has fared so well over the last few years, that
it does have them in such a good place from
a financial perspective when they're studying their portfolio growth that
it allows for whether it be retirees or some of
(12:27):
those higher income eernce to spend more frequently. I do
think that back in April, when the market did see
a very abrupt correction, that there was stories that we
covered Mike about leisure, travel and some of these other
spending areas that were showing weakening demand. But because we
saw a pretty quick correction on that market downturn, it
(12:48):
resumed and there was continued evidence that April through June
was a good period for spending. So in terms of
the recession in the future, it just doesn't it seems
like a lot would need to go wrong in a
short period of time to trigger that. I mean, you
could certainly make the argument for maybe some malaise where
(13:09):
we just don't really see a ton of economic growth,
but it's harder to foresee that occurring, at least in
the nearer term. Here inflation looms a risk out there,
and so does the labor market. But it's incredible how
resilient the consumer has been for what's been the last
four or five years.
Speaker 2 (13:28):
So I'm gonna quote Mark Xandy, he's the chief economist
at Moody's Analytics. I do think that goes to the
bounce in the stock market and the wealth effect. I
think all the spending is coming from well to do,
high income, high net worthhouseholds that are seeing their stock
portfolios are up and they're feeling a lot better off,
and they're spending. The article goes on, but they're then
(13:50):
quoted as saying, let me see, the economy is very
vulnerable if the stock market does turn south for whatever reason.
So I guess the question to me is is it
more elevated than it normally is? Is that risk more
elevated than it normally is? Or is Zandy just calling
out a fact that is always true. Wealthy owned stocks,
(14:11):
wealthy contribute a lot more to the economy than low
income earners, and so therefore it's a more appreciable reason.
The other question I have is do you need just
the stock market to fall or you know, do you
also need real estate values? Do you need crypto markets
(14:32):
to fall too? These have been Crypto is not you know,
nearly the size of the stock market in terms of
its concentration or spending power, But you know, those are
all intertwined as well when it comes to this wealth
effect that we are seeing, and so I remain unconvinced
that just a drop in those areas put us more
at risk than normal. What I do think perhaps puts
(14:53):
us more at risk than normal, though, is the fact
that we are, and we've mentioned this before, in the
ninety eighth percentile. Ever, of how pricey the stock market
is right now, that doesn't necessarily make it more susceptible
to an imminent downturn. It does perhaps make it more
susceptible to a larger downturn, sure, in the event of
(15:14):
some big disruption that, let's be honest, nobody ever is
able to predict ahead of time you'll only see in
the rear view mirror. Does being in the ninety eighth
percentile'll make you more susceptible and therefore contribute to a
bigger pullback and spending and all these other tag along factors. Possibly,
I guess That's where I'll put it is. I'm not
(15:34):
really sure. I buy that this situation is terribly unique.
Speaker 3 (15:39):
That's fair.
Speaker 4 (15:39):
I think that the things I was just thinking about
from an example perspective twenty twenty two was a very
bad year for stocks where the market was down eighteen percent,
and the overwhelming story there wouldn't be a significant declinent
consumer spending because of market related factors. It was the
inflationary pressure that you'd see pullbacks from. But the sentiment
(16:00):
around that time wasn't OG's the market's really getting beat up.
We're slowing down our spending. It was more so the
cost of lumber or you know, all these different items,
cars and other things are so expensive that perhaps that
would slow down the stone. But even that didn't really
put us into a recessionary period. We dodged that bullet
(16:21):
with eight or nine percent inflation at that period of time.
Speaker 2 (16:24):
Yeah, So look, I think there's plenty of reasons to
be concerned both about the wealth effect and what that
could do to stock valuations, as well as a somewhat
frothy market. And I'm not trying to do that myself.
I think that is the description that many analysts are
describing of this market right now is pretty top heavy,
(16:45):
pretty frothy, and if some sort of narrative changes, the
overall one which you know, the narrative right now that
to me is playing out in markets is AI is
going to change everyone's life and so get on the
bandwid That is the narrative that I think need to
change to kind of reverse where the market is going
over the next few years.
Speaker 3 (17:03):
And I was having a conversation with someone last night.
Speaker 4 (17:05):
It's just I don't know when there would be a
moment in time to question that sort of way of thought.
The way of thought now is that, like you said,
AI is going to allow for an increased enhancements of
productivity and a lot of revenue growth.
Speaker 3 (17:20):
And I feel as if.
Speaker 4 (17:21):
We're in the early innings to a point that the
market is not going to be overly critical without revenue progress.
Yet I think that there's some time to go on
that end of things unless there is some abrupt event
that comes unexpected. But the one hundred billion dollars of
capital expenditures to building these data centers, that's going to
take some time to work its way through the system,
and it's going to be hard to have some event
(17:44):
that would really thwart the confidence there just yet.
Speaker 2 (17:47):
Yeah, I think the event that well, there could be
any number of it, but if it's about that, it's
about funding drying up for all this development.
Speaker 3 (17:56):
The event would be a.
Speaker 4 (17:57):
Huge technological advancement like a deep sea that we had
previously the questions how much computing capacity do you need?
Or pricing that's what well?
Speaker 2 (18:08):
That or the willingness of these lenders to say, yeah,
go ahead and spend like wildfire on getting this stuff
up and running right right, And that seems unlikely to
me when it's Microsoft and Google and Amazon that are
funding all of this. But you know, any anything is
possible on that front, and they're not funding every piece
of it. So I think the narrative can change rapidly
(18:29):
when you're talking about something as emerging as artificial intelligence,
just like it did with the Internet. And the longer
you go without companies coming out and saying, here is
the impact to our bottom line.
Speaker 3 (18:44):
This is transforming.
Speaker 2 (18:45):
Here is the clear increase in sales and therefore the
increase in profit from this transformational emerging technology. The longer
you go without that breakthrough story, the longer you go
without that new startup that is like CHATGPT has getting
more users than it is, you know, than ever been
gained on any tech platform in history. That's when investors
(19:06):
start to call it into question, and we are you know,
seemingly not even close to that today. Let's take a
quick break here. When we come back, a lot more
to cover on tariffs and everything else, but we're gonna
be doing Wall Street Watch coming up next, and then
I do want to get to this kind of hidden
story on a company called First Brands. That's next after
Wall Street Watch.
Speaker 1 (19:40):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street Watch. A complete look at what's moving market so
far today right here on the Financial Exchange Radio Network.
Speaker 5 (20:00):
Markets are mostly positive to begin the week, with the
AI sector rebounding after seeing recent pressure. Trader is also
keeping an eye on the potential government shutdown, and we
have a significant September jobs report due out later this
week on Friday morning. Right now, the Dow is dipping
into negative territory mostly flat. SMP five hundred is up
(20:21):
nearly half a percent or thirty points higher, Nasdaq up
nearly nine tenths one percent, or one hundred and ninety
three points higher. Rust two thousand is up a tenth
of a percent. Ten year Treasure Reel down four basis
points and now is at four point one four six percent,
and crude oil down three percent today trading at sixty
(20:42):
three dollars and sixty six cents a barrel. We start
today with some major news in the video game space,
where Electronic Arts said it is going private for fifty
five billion dollars, marking the largest private equity backed buyout
in history. The video game maker this morning said it
agreed to be acquired by public Investment Fund of Saudi Arabia,
silver Lake and Infinity Partners. Shareholders of the company will
(21:06):
receive two hundred and ten dollars per share in cash.
EA stock is jumping five percent on that news. Meanwhile,
cruise operator Carnival report a quarterly results ahead of the
open this morning, beating earnings in revenue expectations driven by
resilient crews demand in strong advanced bookings for twenty twenty six,
in line with record twenty twenty five levels and at
(21:28):
historical high prices. However, shares it down over two percent
at the moment. Elsewhere, global drug maker Astrazenka said it
plans to list directly on the New York Stock Exchange
in a push to broaden its investor base. Separately, on Friday,
the company said it would offer discounted asthma and diabetes
drugs in the US as President Trump pressures pharmaceutical companies
(21:49):
to cut drug prices. In cannabis stocks are seeing gains
today after Trump to out of the benefits of CBD
for seniors. Advisor shares Pure US Cannabis ETF is jumping
by twenty one percent. Rower Cannabis is up by twenty
four percent, until Race shares are surging forty percent. I'm
Tucker Silva, and that is Wall Street Watch.
Speaker 2 (22:11):
All right, Well, we're going to cover now is a
story of a company that I had not heard of
until this weekend. I don't think most people have heard
of them, a Midwest auto parts supplier called First Brands.
That company today intersected with another story that we've been
talking about, which is private credit markets. I do think
we've been giving these two stories a fair bit of
(22:32):
attention recently. One is the auto market and some struggles
that we're seeing there. Two is the private credit market
and where that's gotten to. I want to start off
with the private credit market just to explain what that
is and why that's a big deal today. And to
do that, I'm going back twenty years to five. In
two thousand and five, there was about a point nine
(22:54):
hundred billion dollar industry for US below investment grade debt,
So that was, you know, prior to the Great Recession,
that's the market for you know, below investment grade meaning
you know, it's not your Walmarts and your Berkshire Hathaway borrowing,
it's your smaller companies. And that was dominated by high
yield and leveraged loans. A lot of the banks owned
(23:17):
this stuff, and then when it blew up, that stuff
was also looked at pretty critically, and the banks especially
were looked at critically and said, we don't want you
holding this type of stuff. To that end, this is
more complex than I'm making it. But that type of
debt issuanes didn't stop. It just moved from one place
to another because it basically regularly said it can't happen
(23:40):
at the bank, so we need this to go elsewhere. Today,
the total estimate for below investment grade debt is about
three point eight trillion dollars, again compared to nine hundred
billion back before the Great Recession. More than a quarter
of that is made up in private credit, so again,
(24:01):
high yield and leverage alone still exists, but back then
they were making up ninety percent of this ninety two
percent of it. Today those two categories are making up
seventy ish percent of the total. So private credit has
grown tremendously and is one of the fastest growing areas
of debt issuans out there, and you know, dominated by
some companies that you might not have heard of, right
(24:22):
Apollo Global Management, Blackstone Areas KKR. These are not exactly
household names in the same way that JP, Morgan Chase
and Goldman Sacks are. In any case, it has ballooned tremendously.
Going to conferences in the financial services industry, I can
tell you that it is other than artificial intelligence. Probably
the most talked about thing is private credit and who's
(24:46):
playing what and what the opportunities look like. And sometimes
you know some of the concerns about the landscape. But
it's very opaque. You know, these companies go and issue
debt that's not available on public markets. It doesn't trade,
It's held by a lot of big institutions like insurance
companies and pension funds, and it's just not something that
you get to read on because it doesn't trade every
(25:07):
day like you would publicly traded bond. What happened over
the weekend was this little known car parts supplier out
of the Midwest, making like windshield wipers or and things
like that, declared bankruptcy. And Financial Times, by the way,
has done the best reporting on this if you're looking
(25:28):
to check out some of the stories yourself. They declared bankruptcy,
and it was quickly This is a private company, by
the way, not publicly traded, and it was quickly discovered
that they had a lot more debt than anybody was
really aware of. So estimates that I've seen so far
put their total liabilities somewhere in the ten to fifty
(25:49):
billion range. This is a company whose assets are estimated
between one and ten billion dollars. Now they do this
with all sorts of kind of weird mechanisms to you know,
put this off their balance sheet make their balance sheet
look more attractive. It's kind of like IOU stuff. Hey,
you know, we're going to get this piece from a
(26:10):
part supplier over in China, and we've got a contract
to pay that part supplier over the course of a
couple of years. It's more of an IOU, but it
is a debt. It just didn't end up on their
balance sheet in some cases. But here is what I
suspect is happening all of a sudden at all of
these debt issuers, who, by the way, we don't even know,
you know, who necessarily has the biggest ownership of this debt.
(26:33):
I would suspect that if I were one of them,
I would be calling out to all of my you know, issuers,
all my loan underwriters, and to all of my analysts
of these companies saying, is this unique to First Brands?
Was there something fraudulent going on here where they weren't
properly disclosing or is this you know, is this a
(26:56):
canary in the coal mine of the type of companies
that we are lending to right now? Because First Brand
situation was unique, right, I mean, it's operating in the
auto industry, which has been under a lot of pressure recently. Tricolor,
this other company went bankrupt a couple of weeks ago
because the auto industry because of tariffs, because of a
weak consumer that you contributes a lot to this sector, right.
(27:19):
We talked about irresponsible car buying solutions and people borrowing
a lot of money to do so, like not surprising
that the auto industry is under pressure, so this is
particularly unique. But what if what's not unique is a
bunch of really small companies borrowing a crap ton of
money and nobody knowing about how much is on their balance.
Speaker 3 (27:39):
Sheets, right exactly.
Speaker 4 (27:40):
I mean, some of these measures that are used with
these private credit financing make your head spind in terms
of how intricriate and how are some of these allowable. Like,
there's one particular technique out there that's called payment in
kind financing, where basically, think about if you had a
credit card balance out there and then they came to
you got ten grand on credit card, and the interest
(28:01):
payment comes through, and I say, Mike, all right, it's time.
Speaker 3 (28:03):
To pony up.
Speaker 4 (28:04):
You owe me twenty percent on your ten grand interests
here say you know what, Paul, I'm gonna use payment
kind financing. What I'm gonna do is that interest just
tacking onto the balance that ten grand is gonna jump
to that whatever that monthly payment was of that twenty
two percent or twenty percent, that could balloon your debt
over a course of a year from ten grand to
twelve grand, just because you effectually gave me an iou
(28:25):
you know that interest, Paul, you were looking for for me,
We're gonna just roll it into the balance and there's
similar to the tab put it on the tab. There's
similar types of practices here in other means and inventory
and things like that. And so that's what we're we're
focused on, not specific to these companies. It's alarming, but
are there other instances out there? Because there has been
so much fuel behind this private credit market? And typically
(28:48):
Howard Marx, who is a specialist in this area. He's
the co chairman of oak Tree Capital Management and has
just been a high yield investor debt investor for years,
very successful, said it very simply, the worst loans are
made in the best of times. It's been the best
of times for the last ten or fifteen years for
private credit. And usually you can tell by going to
industry conferences what they're talking about the most usually has
(29:11):
run up the most and there's the most demand behind.
And so that's why we cover this story so much,
is because does this have broader implications?
Speaker 3 (29:20):
Does have broader impact?
Speaker 4 (29:21):
I think to asshare listeners a little bit. This is
private credit market. So we're not talking about the what
we're the Lehman's or what are today the Goldman, Sachs
and JP Morgan that have significant exposure to this. But
that's subprime auto lending that dried up for a lot
of big banks out there, has shifted to other parts
of the market. That's what we're talking about here. The
(29:42):
person who has a credit score under six twenty, who
needs a loan from a lending perspective for a car,
they're not getting it from the major financial institutions out there.
They're looking elsewhere for those types of loans in some instances.
Speaker 2 (29:54):
Let's take a quick break. I do want to get
back into the implications of all this. Yes, small unknown
own Midwest car parts manufacturer going belly up probably doesn't
matter much for you. But if this is some form
of contagion, if there's other stuff, what to worry about,
What not to worry about when it comes to private
credit and the economy generally. That's next on the Financial Exchange.
Speaker 1 (30:17):
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(30:39):
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Speaker 2 (30:48):
If you're just join us. We've been talking about the
bankruptcy of this little known autoparts supplier, First Brands out
of the Midwest and the potential implications that they might
have for the broader economy. If you missed the last segment,
you go check out some information on the Financial Time
check got the podcasted version of this show wherever you
(31:08):
listen to podcasts. But First Brands, which is this relatively
unknown company, relatively small, privately held, declared bankruptcy and all
of a sudden everyone's figuring out just how much debt
they were carrying, and nobody was seemingly aware of it.
One to ten billion dollar company and assets ten to
fifty billion dollars in total debt out there. And here's
(31:30):
where it comes to. I do not believe, even in
the event of a private credit scenario, a blow up
in that private credit space, that we have a worry
about our most important financial institutions. Even if this gets
way worse, this does not appear to be a problem
for Bank of America or JP Morgan Chase, and I
think that is one of the things you can point
(31:51):
to as a success from the rules coming out of
the Great Financial Crisis is these very important institutions that
are out there seem like they are not at all
exposed to all of this, and a lot of retail
investors are not terribly exposed to this space either. So
I take that as a as a win that if
(32:13):
this stuff gets worse, I don't think that we have
much of an issue there in terms of where this
stuff is exposed to, so private credit generally, right, if
you take this story to be a canary in the
coal mine for the private credit space, which I got
to be clear, I don't know that it is. This
could be just a blow up in the auto industry,
and maybe it just stays confined to other areas that
(32:34):
are specifically exposed to tariffs and a weakening consumer on
the lower spectrum of the credit worthiness, right, because that's
what we've seen so far. As sure, a lender called
Tricolor go bankrupt mainly because of subprime borrowers and in
many cases undocumented immigrants borrowing from that company. And then
this one case where we have an autopart supplier going belly.
Speaker 4 (32:57):
Up shades of Silicon Valley Bank and First Republic in
twenty two was where we we mentioned, hey, perhaps this
could be wirespread or it could be contained in a
couple companies, and that's how we moved on from there.
Speaker 2 (33:08):
If if instead, what this is is a come to
Jesus moment for a bunch of private lenders out there
to say, hey, this is interesting this First Brands company. Yeah,
we lend money to them. We didn't really realize how
many other people were involved in lending money to them,
and we certainly didn't know these other credit arrangements they
had with all of their parts. Suppliers, Let's go look
(33:29):
at our book and comb through it. If this is
repeated everywhere and suddenly private credit dries up to even
a small degree or pauses right like, we're just our
investors want us to go comb through everything before we
make any new loans. There are broad implications for the
rest of the market in the economy. One, the holders
(33:49):
of all these package loans, right, these companies go issue
it and then they resell it. Who do they resell
it to? Pension funds, insurance companies, other institutions. Sometimes retail investors,
but not often, so you know, big questions about where
all this stuff is held if it goes bad. Second
piece would be this stuff is funding a whole bunch
of the growth in this economy right now.
Speaker 3 (34:10):
That's important to point out that it's it's not all bad.
Speaker 4 (34:13):
This is there's a lot of positive examples that have
come from the expansion of private credit.
Speaker 2 (34:18):
For it's a necessary thing that happened because the banks
weren't doing.
Speaker 4 (34:21):
It exactly for small businesses and for areas of opportunity
that have helped businesses grow. So it's important to paint
that other side of the picture is just because the
financing wasn't available from your behemoths out there, doesn't mean
that this didn't solve the problem, and in a lot
of places has worked effectively.
Speaker 2 (34:36):
But I'll ask, can you have a continued AI buildout
boom without the participation of private credit if it's going
through its own moment of crisis, Like, how could this
go and affect me and my portfolio? Well, that that
would be an area that it could. Again, this is
all very early, and I think again it could be
weeks or months before we have a real sense from
(34:56):
these companies what happened here and what lessons were learned.
But to me, I don't know the way that that
space started panicking this morning and looking at things was
a bit of a canary in the coal mine on
two converging stories that we've been paying a lot of
attention to. And I don't think that this is getting
the coverage right now that it probably deserves for its significance.
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Speaker 2 (36:27):
The other story that has just been getting absolutely no play.
And I get why because we don't do any of
this manufacturing in the United States. But Jagaguar land Rover Auto,
which has plants for manufacturing the Range Rover in the UK, Slovakia, India, Brazil.
They have been out of action, meaning not producing anything
(36:47):
since the beginning of the month. Wow, it's now September
twenty ninth and this company has not been producing cars
for a month. They just targeted restarting some of these
things on Wednesday. All of this is the seeming result
of a cyber attack that we are still getting some
more details on. It's become so bad that the UK
(37:08):
government just provided a loan guarantee of one and a
half billion dollars and then the company's also seeking to
raise a further two billion dollars from banks to shore
up their finances during this shutdown. This is not the
only problem that is plaguing this carmaker. They're owned, by
the way, by India's Tata Motors. But this is a
(37:29):
huge part of the UK economy, a huge part of
the UK auto industry, and a cyber attack has basically
taken them down and caused their operations to fully stop
now for about a month. Obviously, companies also facing big
problems when it comes to tariffs imposed by the Trump
administration and other pressures that they are looking at. But wow,
(37:52):
the cyber attack taking down a company this large that has,
by the way, nothing to do with technology, right. We
always think about this in terms of, oh, what if
Google go down or what if you know, Facebook gets
hit and they can't sell ads. Like there's a car
manufacturer that can't build cars Jaguar.
Speaker 4 (38:07):
I feel like just his loss doesn't have the same
luster it did ten twenty years ago. The Jaguar brand
land Rover definitely does.
Speaker 2 (38:12):
But quick Break a lot more to cover in the
second hour the Financial Exchange, we'll have a full market
update and more for you, and Corey Adams from Robert
Half join us to talk about the labor market that's
next to the financial exchange
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(01:06):
and Paul Lane.
Speaker 2 (01:12):
Good morning, Happy Monday, Welcome back to the Financial Exchange.
It's Mike, Paul and Tucker with you on a busy
start to a week. Paul, We've got a lot of
data that is due to come out. We've got a
looming government shut down that we will be covering. Nobody
seems terribly concerned about that one, quite honestly. We have
(01:32):
a bunch of data about jobs coming out this week.
Tomorrow Willie will have a job openings survey. On Friday,
we get the monthly jobs report. On Thursday, we get
the weekly jobless claims, a little bit of home sales
data as well, and then finally we will also have
a few earnings coming out. At eleven AM today, we're
going to be discussing another story in quite honestly, it's
(01:57):
a story that's getting overlooked by most major news public
that I think could end up being one of the
biggest stories of the year when it comes to debt
markets and another blow up in the auto industry. But
we'll be covering that at eleven But I want to
start off with the week ahead and just kind of
where to focus because there is a lot coming out
this week. Just cover that schedule again. Pending home sales
(02:19):
just came out seven minutes ago, we'll cover that. Another
home data point tomorrow at nine am is the SMP
Case show Er Home Price Index. We have not seen
a dramatic drop in home prices nationally, but market by
market it's been a little bit interesting. At ten am
tomorrow the Job Openings Report. We do expect to see that.
One Consumer Confidence is also out at ten am, and
(02:42):
then at midnight tomorrow is when the government shutdown could
go into place here, So anything beyond that a little
bit of a question mark in terms of whether we
will get at ADP employment that's done by a private
payroll provider will get that data. Ism manufacturing same story
by a private organization, but other pieces around you know,
(03:03):
the jobless claims out on Thursday as well as I
don't know a factory who puts together the factory orders.
I'm guessing that's private industry as well. And then the
Friday Jobs report is done by the Bureau of Labor Statistics,
which will almost certainly be shut down the event of
a government shutdown, so I wouldn't expect to get that
if we do have this shutdown. But what are you
(03:23):
looking at, Paul that you know could move the narrative
here for the state of the economy, assuming we get
all these releases.
Speaker 3 (03:29):
To me, you'd be the jobs report.
Speaker 4 (03:31):
Obviously, the Federal Reserve has indicated that the labor market
is their biggest concern at the moment. That's why we
saw the most recent rate cut, and there could perhaps
be two more over the course of the end of
the year. So whatever data that we can gather from
Thursday and Friday's reports is really what is going to
be most significant. We had the initial jobless games for
(03:53):
last week come in lower than anticipated, so that was
lower meaning better better than anticipated, So that was certainly
a positive note. Yeah, exactly birdying there. But the week
prior to that, earlier in the month was rather abysmal.
But week to week these numbers can get kind of
noisy on that front. Of course, Friday's report is probably
(04:13):
the most significant of all this week, where we're anticipating
that we would see a fifty thousand increase to non
farm payrolls after a twenty two thousand gain in August.
For the last four months, we're averaging about twenty six
thousand jobs added.
Speaker 3 (04:28):
This is much less than.
Speaker 4 (04:30):
Where we were over the course of the last several years,
where one hundred and fifty thousand was kind of more
the number. So really that is the biggest focus for
me this week. Some of this other stuff is noise
that will definitely fall and keep an eye on, But
the labor market is really of utmost importance and any
data point that could perhaps push it one way or another
(04:51):
is what markets will be most focused on.
Speaker 2 (04:53):
Yeah, I think there's the other piece to the unemployment
rate that comes out on Friday is of key focus,
and you know that's all included in the same report,
But that unemployment rate is the one that the FED
has pointed at over and over to say, this is
more what we care about when we're trying to measure
the tightness or slack in the labor market. It has
slowly crept up from about four to one to four
(05:14):
to three over the last twelve months, but honestly, that's
not a big move and is I think the I
think that's the main item that's kind of holding more
FED governors back from buying into a full end and
full throatd support of more rate cuts down the road.
And so should you see that unemployment rate go down, which, again,
how could that happen when we're seeing such weak job
(05:36):
hiring numbers. Deportations and retirees a right, like, those are
the two main factors that I'm looking at that could
lower the unemployment rate. Would be more people leaving the
workforce because of deportations, more people retiring because baby boomers
are getting older. Now weigh that against a very weak
hiring market right now, employers that are just not pulling
(05:58):
the trigger on the new rules, whether because of AI,
uncertainty about tariffs or some other factor, they are just
not hiring at the pace that they were for the
last several years. And there you land the Fed in a,
you know, particularly difficult conundrum right now. We think we're
a little bit too aggressive in terms of our rates
right now. We don't know how much lower they need
(06:20):
to go. And that Job's report, I think is going
to be key to determining which direction that goes in.
Speaker 4 (06:25):
Yeah, I think it segues us into kind of that
discussion that the rate cuts perhaps they're not enough to
cure the job market. I mean, we have to see
what the job market looks like. As you were just
mentioning there and we were talking about what we'll see
from Friday's report, but what we've seen is, like I mentioned,
a quarter of a percent cut that occurred earlier this month,
and perhaps two more. But typically when you're lowering interest rates,
(06:49):
what that provides to the economy is a boost to
asset prices. So all of a sudden, you know, barring
costs are less or potentially risk free rates of return
are less than they once were, so that would boost
asset prices. But at the same point in time, it
doesn't necessarily trigger an expansion of hiring or anything of
(07:09):
that nature. It's good for people looking to buy house.
Potentially there's some trickle down effect on the interest rate
side of things and for borrowings, but not necessarily an
immediate impact to hiring.
Speaker 2 (07:19):
To be clear, if the labor market needs rescuing, needs saving,
the FED lowering rates has no ability to do that,
rights right, Like, the reason they're cutting rates is not
because they think the labor market needs rescuing. They're doing
it because they think they're maybe getting in the way
a little bit. They think that their policy is a
little bit restrictive for businesses, and so they're saying, hey,
(07:40):
we just need to normalize things so that we stay
out of the way of the economy and of businesses
trying to move forward with their plans. That is the
only thing that the FED is acknowledging here. But yeah,
I mean to your point. If the labor market ends
up in a free fall where unemployment is rising and
rising quickly, the FED really has no real ability to
rescue that on their own. They rely on Congress to
(08:01):
come up with different things, or they just allow for
the business cycle to go through what it needs to
go through, and the best they can do is get
out of the way.
Speaker 3 (08:07):
Right They only have so many tools at their disposal.
Speaker 4 (08:10):
This is one of them to try and stir up
more economic activity or like you said, maybe get out
of the way. But it's not a cure all necessarily.
And that's why we want to focus on the jobs
report in the labor market because it is it's significant
to the overall well being of the economy, and that's
what the FED focuses on too, and tries to do
its best to keep it afloat. But you know, it
(08:32):
doesn't have every tool it's disposal to cure all the ills.
Speaker 2 (08:36):
Let's take a quick break here when we come back.
I want to move on from the FED and the
job market and just talk about this economy and its
possibility of recession. It seems pretty far off. I know
that seems ludicrous to talk about when we're sitting at
four point three percent unemployment and the most reading on
most recent reading on GDP was three point eight percent.
(08:56):
But a few pieces about recession and what seems to
be holding it back at this stage. That's next on
the Financial Exchange.
Speaker 1 (09:04):
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Speaker 5 (09:28):
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Speaker 2 (09:59):
So two different pieces about the economy and where it stands,
and the conclusion of both of them seems to be that, yeah,
recession is seeming pretty far off, but a lot of
the potential reason for that is the spending among the wealthy.
And then drawing that further down, the spending from the
wealthy seems to be coming from a I don't want
(10:22):
to say inflated, but compared to a few years ago
inflated self assessment of their overall net worth. And that's
coming from a number of different areas, stocks, real estate, crypto,
just to name a few of them. But this is
the trend that has been playing out right. We have
a large swath of Americans who are struggling to make
(10:43):
ends meet. You're seeing that through all sorts of survey
data from credit card issuers, from auto loan issuers. Tricolor,
a relatively unknown company that mainly issued car loans to
subprime borrowers, went bank just a couple of weeks ago.
You're seeing cracks in the foundations for that demo. The
(11:06):
other story is that the top ten percent of income
earners now account for half of total consumer spending. And yeah,
subprime auto loan, you know, doesn't seem to matter to
them whatsoever. They keep on spending, going on vacation and
driving this economy forward. So I guess the question is
(11:27):
is that uniquely different than other times in history and
is it something to actually be concerned about? Is the
very difficult question to answer.
Speaker 3 (11:35):
Yeah, that's statistic. Obviously, we've talked about it a lot.
Speaker 4 (11:38):
Half of the consumer spending, you know, consolidated between that
top ten percent of income earners. But it's always been
relatively high, Like if you look back over the last decade,
so it's been forty percent and it's grown. But to
your point, you know, perhaps is it different, It's more
than it was before. I do just have this underlying
(11:59):
suspicion and I wish that there could perhaps be more
data on this.
Speaker 3 (12:02):
It's just it does feel like because.
Speaker 4 (12:05):
You're accounting for so much spending from those people who
are likely pretty heavily invested in the stock market and
have a lot of investment savings, that because the market
has fared so well over the last few years, that
it does have them in such a good place from
a financial perspective when they're studying their portfolio growth that
it allows for whether it be retirees or some of
(12:27):
those higher income eernce to spend more frequently. I do
think that back in April, when the market did see
a very abrupt correction, that there was stories that we
covered Mike about leisure, travel and some of these other
spending areas that were showing weakening demand. But because we
saw a pretty quick correction on that market downturn, it
(12:48):
resumed and there was continued evidence that April through June
was a good period for spending. So in terms of
the recession in the future, it just doesn't it seems
like a lot would need to go wrong in a
short period of time to trigger that. I mean, you
could certainly make the argument for maybe some malaise where
(13:09):
we just don't really see a ton of economic growth,
but it's harder to foresee that occurring, at least in
the nearer term. Here inflation looms a risk out there,
and so does the labor market. But it's incredible how
resilient the consumer has been for what's been the last
four or five years.
Speaker 2 (13:28):
So I'm gonna quote Mark Xandy, he's the chief economist
at Moody's Analytics. I do think that goes to the
bounce in the stock market and the wealth effect. I
think all the spending is coming from well to do,
high income, high net worthhouseholds that are seeing their stock
portfolios are up and they're feeling a lot better off,
and they're spending. The article goes on, but they're then
(13:50):
quoted as saying, let me see, the economy is very
vulnerable if the stock market does turn south for whatever reason.
So I guess the question to me is is it
more elevated than it normally is? Is that risk more
elevated than it normally is? Or is Zandy just calling
out a fact that is always true. Wealthy owned stocks,
(14:11):
wealthy contribute a lot more to the economy than low
income earners, and so therefore it's a more appreciable reason.
The other question I have is do you need just
the stock market to fall or you know, do you
also need real estate values? Do you need crypto markets
(14:32):
to fall too? These have been Crypto is not you know,
nearly the size of the stock market in terms of
its concentration or spending power, But you know, those are
all intertwined as well when it comes to this wealth
effect that we are seeing, and so I remain unconvinced
that just a drop in those areas put us more
at risk than normal. What I do think perhaps puts
(14:53):
us more at risk than normal, though, is the fact
that we are, and we've mentioned this before, in the
ninety eighth percentile. Ever, of how pricey the stock market
is right now, that doesn't necessarily make it more susceptible
to an imminent downturn. It does perhaps make it more
susceptible to a larger downturn, sure, in the event of
(15:14):
some big disruption that, let's be honest, nobody ever is
able to predict ahead of time you'll only see in
the rear view mirror. Does being in the ninety eighth
percentile'll make you more susceptible and therefore contribute to a
bigger pullback and spending and all these other tag along factors. Possibly,
I guess That's where I'll put it is. I'm not
(15:34):
really sure. I buy that this situation is terribly unique.
Speaker 3 (15:39):
That's fair.
Speaker 4 (15:39):
I think that the things I was just thinking about
from an example perspective twenty twenty two was a very
bad year for stocks where the market was down eighteen percent,
and the overwhelming story there wouldn't be a significant declinent
consumer spending because of market related factors. It was the
inflationary pressure that you'd see pullbacks from. But the sentiment
(16:00):
around that time wasn't OG's the market's really getting beat up.
We're slowing down our spending. It was more so the
cost of lumber or you know, all these different items,
cars and other things are so expensive that perhaps that
would slow down the stone. But even that didn't really
put us into a recessionary period. We dodged that bullet
(16:21):
with eight or nine percent inflation at that period of time.
Speaker 2 (16:24):
Yeah, So look, I think there's plenty of reasons to
be concerned both about the wealth effect and what that
could do to stock valuations, as well as a somewhat
frothy market. And I'm not trying to do that myself.
I think that is the description that many analysts are
describing of this market right now is pretty top heavy,
(16:45):
pretty frothy, and if some sort of narrative changes, the
overall one which you know, the narrative right now that
to me is playing out in markets is AI is
going to change everyone's life and so get on the
bandwid That is the narrative that I think need to
change to kind of reverse where the market is going
over the next few years.
Speaker 3 (17:03):
And I was having a conversation with someone last night.
Speaker 4 (17:05):
It's just I don't know when there would be a
moment in time to question that sort of way of thought.
The way of thought now is that, like you said,
AI is going to allow for an increased enhancements of
productivity and a lot of revenue growth.
Speaker 3 (17:20):
And I feel as if.
Speaker 4 (17:21):
We're in the early innings to a point that the
market is not going to be overly critical without revenue progress.
Yet I think that there's some time to go on
that end of things unless there is some abrupt event
that comes unexpected. But the one hundred billion dollars of
capital expenditures to building these data centers, that's going to
take some time to work its way through the system,
and it's going to be hard to have some event
(17:44):
that would really thwart the confidence there just yet.
Speaker 2 (17:47):
Yeah, I think the event that well, there could be
any number of it, but if it's about that, it's
about funding drying up for all this development.
Speaker 3 (17:56):
The event would be a.
Speaker 4 (17:57):
Huge technological advancement like a deep sea that we had
previously the questions how much computing capacity do you need?
Or pricing that's what well?
Speaker 2 (18:08):
That or the willingness of these lenders to say, yeah,
go ahead and spend like wildfire on getting this stuff
up and running right right, And that seems unlikely to
me when it's Microsoft and Google and Amazon that are
funding all of this. But you know, any anything is
possible on that front, and they're not funding every piece
of it. So I think the narrative can change rapidly
(18:29):
when you're talking about something as emerging as artificial intelligence,
just like it did with the Internet. And the longer
you go without companies coming out and saying, here is
the impact to our bottom line.
Speaker 3 (18:44):
This is transforming.
Speaker 2 (18:45):
Here is the clear increase in sales and therefore the
increase in profit from this transformational emerging technology. The longer
you go without that breakthrough story, the longer you go
without that new startup that is like CHATGPT has getting
more users than it is, you know, than ever been
gained on any tech platform in history. That's when investors
(19:06):
start to call it into question, and we are you know,
seemingly not even close to that today. Let's take a
quick break here. When we come back, a lot more
to cover on tariffs and everything else, but we're gonna
be doing Wall Street Watch coming up next, and then
I do want to get to this kind of hidden
story on a company called First Brands. That's next after
Wall Street Watch.
Speaker 1 (19:40):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street Watch. A complete look at what's moving market so
far today right here on the Financial Exchange Radio Network.
Speaker 5 (20:00):
Markets are mostly positive to begin the week, with the
AI sector rebounding after seeing recent pressure. Trader is also
keeping an eye on the potential government shutdown, and we
have a significant September jobs report due out later this
week on Friday morning. Right now, the Dow is dipping
into negative territory mostly flat. SMP five hundred is up
(20:21):
nearly half a percent or thirty points higher, Nasdaq up
nearly nine tenths one percent, or one hundred and ninety
three points higher. Rust two thousand is up a tenth
of a percent. Ten year Treasure Reel down four basis
points and now is at four point one four six percent,
and crude oil down three percent today trading at sixty
(20:42):
three dollars and sixty six cents a barrel. We start
today with some major news in the video game space,
where Electronic Arts said it is going private for fifty
five billion dollars, marking the largest private equity backed buyout
in history. The video game maker this morning said it
agreed to be acquired by public Investment Fund of Saudi Arabia,
silver Lake and Infinity Partners. Shareholders of the company will
(21:06):
receive two hundred and ten dollars per share in cash.
EA stock is jumping five percent on that news. Meanwhile,
cruise operator Carnival report a quarterly results ahead of the
open this morning, beating earnings in revenue expectations driven by
resilient crews demand in strong advanced bookings for twenty twenty six,
in line with record twenty twenty five levels and at
(21:28):
historical high prices. However, shares it down over two percent
at the moment. Elsewhere, global drug maker Astrazenka said it
plans to list directly on the New York Stock Exchange
in a push to broaden its investor base. Separately, on Friday,
the company said it would offer discounted asthma and diabetes
drugs in the US as President Trump pressures pharmaceutical companies
(21:49):
to cut drug prices. In cannabis stocks are seeing gains
today after Trump to out of the benefits of CBD
for seniors. Advisor shares Pure US Cannabis ETF is jumping
by twenty one percent. Rower Cannabis is up by twenty
four percent, until Race shares are surging forty percent. I'm
Tucker Silva, and that is Wall Street Watch.
Speaker 2 (22:11):
All right, Well, we're going to cover now is a
story of a company that I had not heard of
until this weekend. I don't think most people have heard
of them, a Midwest auto parts supplier called First Brands.
That company today intersected with another story that we've been
talking about, which is private credit markets. I do think
we've been giving these two stories a fair bit of
(22:32):
attention recently. One is the auto market and some struggles
that we're seeing there. Two is the private credit market
and where that's gotten to. I want to start off
with the private credit market just to explain what that
is and why that's a big deal today. And to
do that, I'm going back twenty years to five. In
two thousand and five, there was about a point nine
(22:54):
hundred billion dollar industry for US below investment grade debt,
So that was, you know, prior to the Great Recession,
that's the market for you know, below investment grade meaning
you know, it's not your Walmarts and your Berkshire Hathaway borrowing,
it's your smaller companies. And that was dominated by high
yield and leveraged loans. A lot of the banks owned
(23:17):
this stuff, and then when it blew up, that stuff
was also looked at pretty critically, and the banks especially
were looked at critically and said, we don't want you
holding this type of stuff. To that end, this is
more complex than I'm making it. But that type of
debt issuanes didn't stop. It just moved from one place
to another because it basically regularly said it can't happen
(23:40):
at the bank, so we need this to go elsewhere. Today,
the total estimate for below investment grade debt is about
three point eight trillion dollars, again compared to nine hundred
billion back before the Great Recession. More than a quarter
of that is made up in private credit, so again,
(24:01):
high yield and leverage alone still exists, but back then
they were making up ninety percent of this ninety two
percent of it. Today those two categories are making up
seventy ish percent of the total. So private credit has
grown tremendously and is one of the fastest growing areas
of debt issuans out there, and you know, dominated by
some companies that you might not have heard of, right
(24:22):
Apollo Global Management, Blackstone Areas KKR. These are not exactly
household names in the same way that JP, Morgan Chase
and Goldman Sacks are. In any case, it has ballooned tremendously.
Going to conferences in the financial services industry, I can
tell you that it is other than artificial intelligence. Probably
the most talked about thing is private credit and who's
(24:46):
playing what and what the opportunities look like. And sometimes
you know some of the concerns about the landscape. But
it's very opaque. You know, these companies go and issue
debt that's not available on public markets. It doesn't trade,
It's held by a lot of big institutions like insurance
companies and pension funds, and it's just not something that
you get to read on because it doesn't trade every
(25:07):
day like you would publicly traded bond. What happened over
the weekend was this little known car parts supplier out
of the Midwest, making like windshield wipers or and things
like that, declared bankruptcy. And Financial Times, by the way,
has done the best reporting on this if you're looking
(25:28):
to check out some of the stories yourself. They declared bankruptcy,
and it was quickly This is a private company, by
the way, not publicly traded, and it was quickly discovered
that they had a lot more debt than anybody was
really aware of. So estimates that I've seen so far
put their total liabilities somewhere in the ten to fifty
(25:49):
billion range. This is a company whose assets are estimated
between one and ten billion dollars. Now they do this
with all sorts of kind of weird mechanisms to you know,
put this off their balance sheet make their balance sheet
look more attractive. It's kind of like IOU stuff. Hey,
you know, we're going to get this piece from a
(26:10):
part supplier over in China, and we've got a contract
to pay that part supplier over the course of a
couple of years. It's more of an IOU, but it
is a debt. It just didn't end up on their
balance sheet in some cases. But here is what I
suspect is happening all of a sudden at all of
these debt issuers, who, by the way, we don't even know,
you know, who necessarily has the biggest ownership of this debt.
(26:33):
I would suspect that if I were one of them,
I would be calling out to all of my you know, issuers,
all my loan underwriters, and to all of my analysts
of these companies saying, is this unique to First Brands?
Was there something fraudulent going on here where they weren't
properly disclosing or is this you know, is this a
(26:56):
canary in the coal mine of the type of companies
that we are lending to right now? Because First Brand
situation was unique, right, I mean, it's operating in the
auto industry, which has been under a lot of pressure recently. Tricolor,
this other company went bankrupt a couple of weeks ago
because the auto industry because of tariffs, because of a
weak consumer that you contributes a lot to this sector, right.
(27:19):
We talked about irresponsible car buying solutions and people borrowing
a lot of money to do so, like not surprising
that the auto industry is under pressure, so this is
particularly unique. But what if what's not unique is a
bunch of really small companies borrowing a crap ton of
money and nobody knowing about how much is on their balance.
Speaker 3 (27:39):
Sheets, right exactly.
Speaker 4 (27:40):
I mean, some of these measures that are used with
these private credit financing make your head spind in terms
of how intricriate and how are some of these allowable. Like,
there's one particular technique out there that's called payment in
kind financing, where basically, think about if you had a
credit card balance out there and then they came to
you got ten grand on credit card, and the interest
(28:01):
payment comes through, and I say, Mike, all right, it's time.
Speaker 3 (28:03):
To pony up.
Speaker 4 (28:04):
You owe me twenty percent on your ten grand interests
here say you know what, Paul, I'm gonna use payment
kind financing. What I'm gonna do is that interest just
tacking onto the balance that ten grand is gonna jump
to that whatever that monthly payment was of that twenty
two percent or twenty percent, that could balloon your debt
over a course of a year from ten grand to
twelve grand, just because you effectually gave me an iou
(28:25):
you know that interest, Paul, you were looking for for me,
We're gonna just roll it into the balance and there's
similar to the tab put it on the tab. There's
similar types of practices here in other means and inventory
and things like that. And so that's what we're we're
focused on, not specific to these companies. It's alarming, but
are there other instances out there? Because there has been
so much fuel behind this private credit market? And typically
(28:48):
Howard Marx, who is a specialist in this area. He's
the co chairman of oak Tree Capital Management and has
just been a high yield investor debt investor for years,
very successful, said it very simply, the worst loans are
made in the best of times. It's been the best
of times for the last ten or fifteen years for
private credit. And usually you can tell by going to
industry conferences what they're talking about the most usually has
(29:11):
run up the most and there's the most demand behind.
And so that's why we cover this story so much,
is because does this have broader implications?
Speaker 3 (29:20):
Does have broader impact?
Speaker 4 (29:21):
I think to asshare listeners a little bit. This is
private credit market. So we're not talking about the what
we're the Lehman's or what are today the Goldman, Sachs
and JP Morgan that have significant exposure to this. But
that's subprime auto lending that dried up for a lot
of big banks out there, has shifted to other parts
of the market. That's what we're talking about here. The
(29:42):
person who has a credit score under six twenty, who
needs a loan from a lending perspective for a car,
they're not getting it from the major financial institutions out there.
They're looking elsewhere for those types of loans in some instances.
Speaker 2 (29:54):
Let's take a quick break. I do want to get
back into the implications of all this. Yes, small unknown
own Midwest car parts manufacturer going belly up probably doesn't
matter much for you. But if this is some form
of contagion, if there's other stuff, what to worry about,
What not to worry about when it comes to private
credit and the economy generally. That's next on the Financial Exchange.
Speaker 1 (30:17):
The Financial Exchange is now available on your Alexis Smart
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Hit the subscribe button and leave us a five star review.
(30:39):
This is the Financial Exchange Radio network.
Speaker 2 (30:48):
If you're just join us. We've been talking about the
bankruptcy of this little known autoparts supplier, First Brands out
of the Midwest and the potential implications that they might
have for the broader economy. If you missed the last segment,
you go check out some information on the Financial Time
check got the podcasted version of this show wherever you
(31:08):
listen to podcasts. But First Brands, which is this relatively
unknown company, relatively small, privately held, declared bankruptcy and all
of a sudden everyone's figuring out just how much debt
they were carrying, and nobody was seemingly aware of it.
One to ten billion dollar company and assets ten to
fifty billion dollars in total debt out there. And here's
(31:30):
where it comes to. I do not believe, even in
the event of a private credit scenario, a blow up
in that private credit space, that we have a worry
about our most important financial institutions. Even if this gets
way worse, this does not appear to be a problem
for Bank of America or JP Morgan Chase, and I
think that is one of the things you can point
(31:51):
to as a success from the rules coming out of
the Great Financial Crisis is these very important institutions that
are out there seem like they are not at all
exposed to all of this, and a lot of retail
investors are not terribly exposed to this space either. So
I take that as a as a win that if
(32:13):
this stuff gets worse, I don't think that we have
much of an issue there in terms of where this
stuff is exposed to, so private credit generally, right, if
you take this story to be a canary in the
coal mine for the private credit space, which I got
to be clear, I don't know that it is. This
could be just a blow up in the auto industry,
and maybe it just stays confined to other areas that
(32:34):
are specifically exposed to tariffs and a weakening consumer on
the lower spectrum of the credit worthiness, right, because that's
what we've seen so far. As sure, a lender called
Tricolor go bankrupt mainly because of subprime borrowers and in
many cases undocumented immigrants borrowing from that company. And then
this one case where we have an autopart supplier going belly.
Speaker 4 (32:57):
Up shades of Silicon Valley Bank and First Republic in
twenty two was where we we mentioned, hey, perhaps this
could be wirespread or it could be contained in a
couple companies, and that's how we moved on from there.
Speaker 2 (33:08):
If if instead, what this is is a come to
Jesus moment for a bunch of private lenders out there
to say, hey, this is interesting this First Brands company. Yeah,
we lend money to them. We didn't really realize how
many other people were involved in lending money to them,
and we certainly didn't know these other credit arrangements they
had with all of their parts. Suppliers, Let's go look
(33:29):
at our book and comb through it. If this is
repeated everywhere and suddenly private credit dries up to even
a small degree or pauses right like, we're just our
investors want us to go comb through everything before we
make any new loans. There are broad implications for the
rest of the market in the economy. One, the holders
(33:49):
of all these package loans, right, these companies go issue
it and then they resell it. Who do they resell
it to? Pension funds, insurance companies, other institutions. Sometimes retail investors,
but not often, so you know, big questions about where
all this stuff is held if it goes bad. Second
piece would be this stuff is funding a whole bunch
of the growth in this economy right now.
Speaker 3 (34:10):
That's important to point out that it's it's not all bad.
Speaker 4 (34:13):
This is there's a lot of positive examples that have
come from the expansion of private credit.
Speaker 2 (34:18):
For it's a necessary thing that happened because the banks
weren't doing.
Speaker 4 (34:21):
It exactly for small businesses and for areas of opportunity
that have helped businesses grow. So it's important to paint
that other side of the picture is just because the
financing wasn't available from your behemoths out there, doesn't mean
that this didn't solve the problem, and in a lot
of places has worked effectively.
Speaker 2 (34:36):
But I'll ask, can you have a continued AI buildout
boom without the participation of private credit if it's going
through its own moment of crisis, Like, how could this
go and affect me and my portfolio? Well, that that
would be an area that it could. Again, this is
all very early, and I think again it could be
weeks or months before we have a real sense from
(34:56):
these companies what happened here and what lessons were learned.
But to me, I don't know the way that that
space started panicking this morning and looking at things was
a bit of a canary in the coal mine on
two converging stories that we've been paying a lot of
attention to. And I don't think that this is getting
the coverage right now that it probably deserves for its significance.
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Speaker 2 (36:27):
The other story that has just been getting absolutely no play.
And I get why because we don't do any of
this manufacturing in the United States. But Jagaguar land Rover Auto,
which has plants for manufacturing the Range Rover in the UK, Slovakia, India, Brazil.
They have been out of action, meaning not producing anything
(36:47):
since the beginning of the month. Wow, it's now September
twenty ninth and this company has not been producing cars
for a month. They just targeted restarting some of these
things on Wednesday. All of this is the seeming result
of a cyber attack that we are still getting some
more details on. It's become so bad that the UK
(37:08):
government just provided a loan guarantee of one and a
half billion dollars and then the company's also seeking to
raise a further two billion dollars from banks to shore
up their finances during this shutdown. This is not the
only problem that is plaguing this carmaker. They're owned, by
the way, by India's Tata Motors. But this is a
(37:29):
huge part of the UK economy, a huge part of
the UK auto industry, and a cyber attack has basically
taken them down and caused their operations to fully stop
now for about a month. Obviously, companies also facing big
problems when it comes to tariffs imposed by the Trump
administration and other pressures that they are looking at. But wow,
(37:52):
the cyber attack taking down a company this large that has,
by the way, nothing to do with technology, right. We
always think about this in terms of, oh, what if
Google go down or what if you know, Facebook gets
hit and they can't sell ads. Like there's a car
manufacturer that can't build cars Jaguar.
Speaker 4 (38:07):
I feel like just his loss doesn't have the same
luster it did ten twenty years ago. The Jaguar brand
land Rover definitely does.
Speaker 2 (38:12):
But quick Break a lot more to cover in the
second hour the Financial Exchange, we'll have a full market
update and more for you, and Corey Adams from Robert
Half join us to talk about the labor market that's
next to the financial exchange
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