Why so many bankruptcies?

Rob Armstrong (0:06)

Pushkin. Bankruptcies are up in America, and I am not talking about moral bankruptcy, nor am I even talking about personal bankruptcy. I'm talking about corporate bankruptcy. 2024, the highest number of corporate bankruptcy filings since 2010, according to S&P. Today on the show is America teetering on the edge of economic disaster.

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Rob Armstrong, coming to you from the frostbitten and frigid headquarters of Unhedged here in New York. There's icicles hanging from the ceilings. We can see our breath. A polar bear is tapping at the window. I'm joined by Aiden Reiter, who's wearing five scarves on the other side of the table.

Aiden Reiter (1:10)

Hello. It's almost hard to talk over all these scarves.

Rob Armstrong (1:16)

Okay. What's weird about this to me, Aiden, is that you wrote about this increase in bankruptcies the other day. But what we've mostly been working on recently is increasing evidence that the US economy, rather than being too weak or starting to wobble, is concerningly strong.

Aiden Reiter (1:36)

Yeah. We've had a couple of stronger than hoped inflation readings. We had a Fed meeting that showed Fed is very cautious about what inflation might be in the next year. And you're cautious about other things too, but we don't need to talk about that. Yeah. And we've had a couple other data readings that are supportive of a stronger economy.

Rob Armstrong (1:55)

PMIs are warming up. Surveys of business purchasing managers, they're saying new orders are rising. There's been an uptick, especially on the manufacturing side, which we haven't seen in a long time.

Aiden Reiter (2:08)

Job openings are up, suggesting we're entering into a slightly tighter labor market.

Rob Armstrong (2:12)

The bond market's kind of worried about all of this. That's one interpretation of what the bond market is doing.

Aiden Reiter (2:16)

Yeah. Yields on 10-year treasuries are way up. They're at their highest level since last April. They're at 4.7%. Right.

Rob Armstrong (2:22)

So that means bond prices are falling, and that's consistent with a Fed that stays a little tighter and et cetera, et cetera, and people preferring to be in equities maybe. It could mean all kinds of things. And yet, amidst all this slight concern about an overheating economy, we have this bankruptcy number, which is strange.

Aiden Reiter (2:43)

It's a little up from last year. I think it's what? 8% up?

Rob Armstrong (2:46)

8%, yes.

Aiden Reiter (2:48)

So things have not been amazing for a while, but they're getting worse arguably, or hey, they had been getting worse for some of these companies.

Rob Armstrong (2:54)

I mean, looking at this at the time series of that S&P provides here, the natural interpretation is something like this. You had high bankruptcies still in 2010 because we're still operating in the shadow of the great financial crisis. But then the fact that the Fed has basically pushed rates way down, kicks in. And you have low bankruptcies every year up until now, simply because rates are so low.

Aiden Reiter (3:22)

That is an interpretation.

Rob Armstrong (3:24)

Yeah, yeah, and interpretation. And bankruptcies were basically nothing in 21 and 2022 because it was basically illegal to go bankrupt at that time.

Aiden Reiter (3:31)

Yeah, you were getting pumped with money, pumped with PPP to stop you from getting bankrupt.

Rob Armstrong (3:35)

And so now it's like this is just your turn to normalcy. And so I would guess that the companies that are going bankrupt, the first guess would be they're the ones who mismanaged their debt. Rates are higher now. It is now possible to go bankrupt again because interest rates have risen.

Aiden Reiter (3:50)

But that is a great guess about what might be happening. But we took a closer look and it might not really be the answer.

Rob Armstrong (3:57)

I love how great guess is just a euphemism for you are wrong.

Aiden Reiter (4:02)

Well, you're as wrong as far as we can tell. So we looked at the 10 biggest bankruptcies and called out a couple names. So of those 10 biggest bankruptcies, five were private, so we didn't look at those. One was just this essentially an asbestos legal claim holding company that was meant to go bankrupt on behalf of Johnson & Johnson. Think what you want about that. That's enough for another podcast. Then four were these relatively big names. Then we added in two other big names that we thought we were going to try.

Rob Armstrong (4:29)

So what are the companies we're talking about here?

Aiden Reiter (4:31)

So we're talking about Big Lots, which is a home goods store and discount seller, container maker Tupperware of 1950s fame, fabric seller Joanne Stores. We've got Party City, where everybody loves to go buy Halloween costumes and other fun party supplies. Discount Air Carrier Spirit Airlines, the butt of every SNL joke. Franchise Group, which is the owner of retail chains, the Vitamin Chop, Pet Supplies Plus, and a couple other franchise chains.