View as:
View as:

Transcript Corporate America: Ground Zero of the Next Crisis

With: Scott Minerd, Guggenheim Partners Global CIO, Portfolio Manager, Litman Gregory Masters High Income Alternatives Fund

Date: November 14, 2019

Jack Chee: Let’s talk about fundamentals and that type of downgrade of the lower rung of investment-grade into high-yield.

Scott Minerd: Sure.

If we pull up Slide Number 10 – that’s it – this is the history of credit spreads. We can see the backup we got last year in credit toward the end of the year here in the blue line. That’s the most pronounced. Then we see what really –

When you look at it in perspective, it’s a really relative modest retracement. But what’s interesting is, if you went back and looked at the energy meltdown in 2015/2016, that didn’t even result in a recession. We got nowhere near those kinds of levels in the backup last year.

We don’t even need a recession to have a massive widening in credit spreads. When you look at this chart and see how much room to the downside we have, the asymmetry between the downside opportunity in credit in terms of spread-tightening and its increase, I mean – it’s just startling.

If we go to the next slide – 11 – the fundamental problem we’re concerned about is what I like to say, “The gross-debt-to-GDP (gross domestic product).” A lot of people focus on the net-debt-to-GDP. That’s not near the highs, yet.

But the reason I don’t like net-debt-to-GDP is unless you think we’re going to have corporate socialism, the large cash balances on Corporate America’s balance sheets are concentrated in about a dozen companies.

So unless we think that Apple is going to just rain money down on somebody else, and give them money when they’re in trouble, the real issue is the gross-debt-to-GDP.

This is sitting at record highs. When you consider that today in the investment-grade market for the first time ever, more than 50% of all the outstanding investment-grade debt is rated triple-B – our estimates, if we have a mild recession – equivalent to what we had back in 2000 or 2001 –

If we use that as a corollary experience, that resulted in about a 15% migration from investment-grade to below-investment-grade. That would be the equivalent of a trillion dollars.

To put that into perspective, the entire high-yield bond market today is about a trillion dollars.

The dislocation that’s going to happen when this occurs –

First off, I don’t think Litman Gregory would be the first people to step in or the first firm to suddenly recommend that people get overweight high-yield. Because they’ll recognize how bad it can be.

But I can tell you that other people who have reached for yield – and I’ve got to tell you, the insurance industry is like ground-zero. We have a lot of insurance clients. We get a lot of pressure from our clients to increase our allocation to triple-B bonds, because the whole industry is doing it.

Once this thing starts to slide, people aren’t going to be putting more money into high-yield bonds in the mutual funds. They’re going to be going in the other direction.

The amount of capital it’s going to take to absorb all of this debt is mind-numbing, relative to the size of the market. Now, people say, “Well,” they point to all kinds of other things. The thing that I think is the most realistic assessment I hear is, there are about $2 trillion today in commitments to fund private-equity.

Some of the smarter private-equity firms out there will say, “Hey. This qualifies. Let’s step in and buy some of this distressed debt.” But remember, the kinds of returns they’re looking for are 15% or 20%. They’re not where triple-B bonds today yield less-than 4% and all kinds of stuff.

The other interesting thing here is, I think there’s going to be a peculiar opportunity to this downgrade cycle relative to others. That is the number of investment-grade corporate issuers who have long-duration bonds – like ATT. I’m going to stay away from utilities, because we’re pretty negative on utilities.

These people who issued a lot of debt and it gets downgraded to below-investment-grade – those long-duration bonds don’t really have a real home.

The high-yield market is sort of an under-10-year market. Where this long-duration high-yield debt’s going to go is going to be a real question. I would say don’t be surprised if it ends up in your portfolio.

Audience: If we avoided recession by lowering interest rates this year, won’t that just make the recession worse when it gets here?

Scott Minerd: Yes. You’re a man after my own heart. This is one of the things that I wrote about last year when we started to talk about Indian Summer. If the Fed (Federal Reserve) were to try to address the issues that we’ve identified, which is the overleverage of Corporate America, really – that’s ground-zero. It’s not going to be housing. It’s not going to be –

The last crisis is never where the next one comes.

Corporate America. Even the Fed is concerned about this. Yes. Yes, reviving the animal spirits, which I think we’re in the midst of doing is leading to things like the potential LBO (leveraged buyout) of Walgreens. That is in their own words – is it Schwartzman or Leon Black – I can’t remember which one –

It’s a reach. The amount of debt they’re going to have to issue to do this. Yes. It’s going to be worse. This is one of the debates we have around the table in New York at the Fed. Not many people agree with me that we would be better off to allow the business cycle to run its natural course rather than building up excesses into the future. Unless we would have some sort of policy-response on the fiscal side to address the shortages of labor and other things, which are ultimately going to be the things that make the Fed have to kill the expansion.

Stay Informed

iMGP Funds emails provide investors a way to stay in touch with us and receive information regarding the funds and investment principles in general. Topics may include updates on the funds and managers, further insights into our investment team’s processes, and commentary on various aspects of investing.


Each fund’s investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus and summary prospectuses contain this and other important information about the investment company, and it may be obtained by calling (800) 960-0188 or visiting Please read it carefully before investing.

Each of the funds may invest in foreign securities. Investing in foreign securities exposes investors to economic, political, and market risks and fluctuations in foreign currencies. Each of the funds may invest in the securities of small companies. Small-company investing subjects investors to additional risks, including security price volatility and less liquidity than investing in larger companies. The International Fund will invest in emerging markets. Investments in emerging market countries involve additional risks such as government dependence on a few industries or resources, government-imposed taxes on foreign investment or limits on the removal of capital from a country, unstable government, and volatile markets. The Alternative Strategies Funds will invest in debt securities. Investments in debt securities typically decrease when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in mortgage-backed securities include additional risks that investor should be aware of including credit risk, prepayment risk, possible illiquidity, and default, as well as increased susceptibility to adverse economic developments. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. The Alternatives Strategies Fund will invest in derivatives. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management, and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. The Alternative Strategies Fund may make short sales of securities, which involves the risk that losses may exceed the original amount invested. Merger arbitrage investments risk loss if a proposed reorganization in which the fund invests is renegotiated or terminated. Leverage may cause the effect of an increase or decrease in the value of the portfolio securities to be magnified and the fund to be more volatile than if leverage was not used. Investment in absolute return strategies are not intended to outperform stocks and bonds during strong market rallies.

Diversification does not assure a profit nor protect against loss in a declining market.

Correlation is a statistical measure of how two variables move in relation to each other.

An Investment Grade bond is a bond with a rating of AAA to BBB; a Below Investment Grade bond is a bond with a rating lower than BBB

Mutual fund investing involves risk. Principal loss is possible.

Opinions expressed are subject to change at any time, are not guaranteed & should not be considered investment advice.

Litman Gregory Fund Advisors, LLC has ultimate responsibility for the performance of the iMGP Funds due to its responsibility to oversee the funds’ investment managers and recommend their hiring, termination, and replacement.

iMGP Funds are distributed by ALPS Distributors Inc. LGM000878 exp. 12/20/2020