Implications of Small Business Bankruptcies, Ep. 274

Capitalist Investor

1. Rising Bankruptcy Rates:
While still below pre-Covid levels, bankruptcies have increased by 16% year-over-year, with small business bankruptcies up a staggering 60%. The rate of change is alarming and may signal future economic troubles.
2. Notable Bankruptcies:
The hosts discussed several high-profile bankruptcies, including Red Lobster, which had accumulated $1 billion in debt, and Express, a consumer discretionary teen apparel brand. These cases illustrate the challenges faced by companies in adapting to changing consumer preferences and managing debt.
3. Solar and EV Companies Struggle:
Many solar and electric vehicle (EV) companies are facing bankruptcy due to a combination of factors, including high technology costs, lack of consumer demand, and the need for financing. Government incentives have not been enough to sustain these businesses in the long run.
4. Housing Market Concerns:
Lumber Liquidators, a flooring company, recently went bankrupt, highlighting the slowdown in home sales and renovations. Some home builders are acting as banks by offering self-financing options, which could lead to further issues if the economy continues to decline.
5. The Impact of Interest Rates:
The rising cost of borrowing money, with interest rates increasing from 1-3% to 8% or higher, is putting pressure on businesses across all sectors. This squeeze on margins is catching up with companies that may have taken on too much debt during the low-interest rate environment.
The hosts conclude that while the current situation may not be the end, it could be the beginning of a more significant "wipeout" as the Federal Reserve continues its efforts to cool off the labor market and combat inflation. The extent of the damage and the Fed's response to interest rates when things do break remain to be seen.

Chapters

1. PE firm bought Red Lobster, split company. (00:00:00)

2. Less people eating out, more steak places. (00:03:34)

3. Someone said solar companies resemble money laundering. (00:07:40)

4. Someone said solar companies resemble money laundering. (00:09:24)

5. Potential lawsuits and unknown financial risks for companies. (00:12:51)