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[Fox Business] US economy faces a ‘reckoning’ over rising loan costs
The era of easy money is finally coming to an end, and the U.S. economy faces a “reckoning” as businesses grapple with rising loan costs, according to a new survey from RSM.
The findings indicate that rising interest rates pushed up the cost of commercial and industrial loans, making it more difficult for middle-market firms to meet payrolls and finance any expansion.
More than three-quarters – about 77% – of senior executives at firms expect interest rates to increase in the coming months. A stunning 82% of respondents in the RSM Middle Market Business Index survey said that rising rates carried a negative risk to their operations.
US RECESSION REMAINS ‘MORE LIKELY THAN NOT,’ DEUTSCHE BANK WARNS
“The result is a risk to economic growth across the real economy and, potentially, a recession,” said RSM chief economist Joe Brusuelas in a related blog post about the survey.
The astronomical rise in rates is hitting smaller businesses the hardest. Small and mid-sized firms already pay anywhere between 10.9% to 15.5% for financing, the survey found, far higher than in the past two decades. Those rates are raising the risk premium on lending close to double-digits, a “dynamic that was hard to imagine even two years ago.”
For many firms, higher rates have yet to take effect. About one-third of smaller middle-market firms have loans paying below 5%, while about 24% have loans between 5% and 7%. Those loans will ultimately need to be rolled over at higher rates, further threatening cash flow.
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Brusuelas pointed to recent research that indicates after a tightening shock of 100 basis points, research and development spending declines anywhere between 1% and 3%, while venture capital spending plummets by about 25% in the following one to three years.
Federal Reserve policymakers have raised interest rates sharply over the past year, approving 11 rate hikes in hopes of crushing inflation. In the span of just one year, interest rates surged from near zero to above 5%, the fastest pace of tightening since the 1980s.
Officials have signaled that additional rate hikes are on the table this year until there is more substantial evidence that high inflation has retreated for good.
The Fed next meets Sept. 19-20, and is widely expected to hold rates steady at the current 22-year high.
Given the rapid rise in interest rates, the impact on lending conditions across the economy is “nontrivial.”
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Manufacturing, housing, technology, life sciences firms and private equity will face “significant adjustment” periods during the new age of high interest rates.
“The zero interest rate era has ended. A new era with higher nominal and real interest rates is upon us,” Brusuelas wrote. “Middle market firms report paying, in some cases, double-digit rates to finance payroll and business expansions – far higher than in the past 20 years. Adding to the risk is the large volume of loans made during the previous era that need to be rolled over at significantly higher rates.”
[Fox Business] China risks should get disclosed by large US companies, says former SEC chair
Large U.S. companies should start disclosing their exposure to China to shed light on potential risks for the benefit of investors and policymakers, the former head of the Securities and Exchange Commission (SEC) told lawmakers on Tuesday.
Jay Clayton, who led the SEC from 2017 to 2020, testified at a field hearing held by the House Select Committee on the Chinese Communist Party (CCP) in New York and proposed a pilot program in which public U.S. companies that meet certain thresholds would disclose their exposure to China. Under his proposal, companies with market capitalizations over $50 billion or with China-based revenues or costs over $10 billion would make the disclosures.
“This is an area where I would at least consider a pilot program for very large companies disclosing the China-specific risks and what sort of scenario planning they have done in the event of an abrupt decoupling,” Clayton told the panel. “This is not about liability, it’s not about ‘gotcha’ — it’s just about in the boardroom, if you have a substantial exposure to China, how have you thought about the type of risks that you’re talking about if they come to fruition and provide that information to investors.”
Clayton, who testified alongside Wall Street investor Jim Chanos and short-seller Anne Stevenson-Yang, added that the increased disclosure would reduce systemic risks to the stability of the U.S. financial system.
Clayton’s suggestions come amid heightened economic competition and geopolitical tensions between the world’s two biggest economies.
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China is facing mounting allegations related to its espionage activities after a spy balloon transited the U.S. earlier this year, in addition to criticism over its human rights abuses against Uyghur Muslim minorities and threats towards its neighbors in Taiwan, the South China Sea and India.
The U.S. is ratcheting up export controls to prevent sensitive technologies from being sold to Chinese firms and has sanctioned a number of Chinese companies linked to the use of Uyghur forced labor.
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“When U.S. capital flows to China, it props up the CCP’s military, genocide and technoauthoritarian aspirations,” select committee member Rep. Ashley Hinson, R-Iowa, told FOX Business. “Many Americans are unwittingly funding the CCP’s malign activities, essentially fueling China’s attempted takedown of the United States. Additionally, the CCP doesn’t play by the same rules American companies do — investors have no guarantee they’ll get their money back if the CCP decides to pull the plug one day.”
“Increased transparency is vital to strategically decoupling from China, ensuring our long-term economic prosperity, and protecting American workers from China’s destructive policies,” she added.
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Ranking Member Raja Krishnamoorthi, D-Ill., noted that there are over 250 Chinese companies listed on U.S. stock exchanges with a total market cap of over $1 trillion, but those firms don’t follow the same standards in terms of disclosures to protect investors.
“The CCP is cracking down on the very act of disclosing risk,” he said during the hearing. “The CCP is doing this by cracking down on due diligence to the point where the U.S. Chamber of Commerce has said that ‘risk can’t be properly assessed.’”
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“The CCP is so afraid of bad news getting out that they’ve stopped publishing their skyrocketing youth unemployment numbers, and instructed investment banks to avoid publishing politically sensitive data that could make the Chinese economy look bad,” Krishnamoorthi added.
Reuters contributed to this report.
[Fox Business] BP CEO resigns after failing to disclose personal relationships with colleagues
Bernard Looney is out as CEO of BP after failing to fully disclose personal relationships with colleagues, the company said Tuesday.
“Mr. Looney has today informed the Company that he now accepts that he was not fully transparent in his previous disclosures,” BP said in a press release. “He did not provide details of all relationships and accepts he was obligated to make more complete disclosure.”
The release said BP’s board received allegations in May 2022 from an anonymous source regarding Looney’s behavior regarding personal relationships with others at the company, and that the CEO revealed a “small number” of past relationships with BP colleagues at the time.
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“However, the Board sought and was given assurances by Mr. Looney regarding disclosure of past personal relationships, as well as his future behaviour,” the release reads. “Further allegations of a similar nature were received recently, and the Company immediately began investigating with the support of external legal counsel. That process is ongoing.”
Looney, 53, started his career at BP at the age of 21 and rose to CEO in 2020, according to the Financial Times, which first reported his departure. As chief executive, he vowed to reinvent the 114-year-old company with plans for the British energy giant to achieve zero net emissions by 2050, and to invest billions in renewable and low-carbon power.
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Leaders failing to disclose personal relationships with colleagues or even engaging in them at all is a deal-breaker for many companies, and other CEOs have left their posts over similar circumstances in recent years.
McDonald’s ousted former CEO Steve Easterbook in 2019 for engaging in a “consensual relationship with an employee,” and former Intel CEO Brian Krzanich stepped down in 2018 after the semiconductor manufacturer found out he had a “past relationship with an Intel employee.”
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Reuters contributed to this report.
[Fox Business] Airfare drops in fall months before holiday price surge
Airline ticket prices have dropped more than 30% this fall from peak summer highs, according to new data.
Airfare throughout September and October — known as “shoulder season” — for domestic trips has fallen to an average of $211 per ticket, down 29% from prices during the peak summer period of June through August, according to travel app Hopper.
Fares during shoulder season are down 9% compared with the same time a year ago and 10% from pre-pandemic times, according to Hopper.
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Prices for international trips have also fallen, with ticket prices to Europe down 31% from summer peaks.
When summer travel was in full swing, prices to Europe surged to highs not seen in the past six years. Flights were averaging nearly $1,200 per round trip. For some popular destinations, the cost was more than $1,400 on average per ticket.
Currently, international trips in September or October are averaging just $738.
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“Along with the cooler weather in September comes ‘back to school’ season and an annual slowdown in demand for travel,” said Hopper lead economist Hayley Berg. “In an effort to incentivize travelers to book trips in early fall, airlines will drop prices to encourage travelers to schedule one more trip before the busy holiday season begins.”
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It’s a prime opportunity for a weekend getaway or a bucket list vacation because travelers can stretch their travel budget further, Berg said.
Holiday fares are also lower during this season. Berg advises travelers to book holiday trips in September and early October before prices surge.
[NewYorkPost] Yankees inch close to escaping AL East basement with win over rival Red Sox
The Yankees still reside in the basement of the division as of Tuesday afternoon, but they pulled a little closer to the Red Sox by...