Andrew Redleaf Says Prepare For Bankruptcies
“The overwhelming and dominant factor is that we’ll have very, very subdued growth for a very long period of time,” Redleaf said on the Contrarian Investor Podcast. “A number of businesses that probably shouldn’t have existed before – we are going to see their bankruptcies and their liquidations accelerate.”
At issue is access to capital, specifically cheap sources of financing that is necessary for companies to grow. The global economy is split between those financial actors that have what Redleaf calls “privileged access to capital” and those that only have “restricted access to capital.” This division, which dates to the 2008 financial crisis, has been widening.
Most companies and governments, especially smaller ones, are on the “restricted” side of this divide. “For them, their cost of capital, and the accessibility of capital, is more restrictive today than it was at almost any point between 1978 and 2008,” says Redleaf. This exacerbates inequality and hurts dynamism in the economy as a whole.
As a result, 2% U.S. GDP growth will likely be “the upper edge of what growth might be over the next 20 years.” This will be particularly painful in light of “the expectations people might have on the entitlement side or on the retirement side,” says Redleaf. For investors, “one should really be leery of value traps,” especially among small cap stocks. “If you’re in business, you really really do not want to be competing with somebody who has free access to capital.”
Large cap value stocks, on the other hand, should benefit over the short term. Most S&P 500 companies are among the “privileged access” group and “the value momentum reversal trade has legs,” says Redleaf.
Another pocket of safety can be found, counterintuitively, in regional U.S. banks. “Small banks have privileged access to capital too,” and Redleaf himself bought one of these institutions in 2015. “Even as a very small bank I think we’ll continue to have privileged access to capital.” The business opportunity comes from the large number of potential borrowers “that really are bankable but don’t have access to cheap capital.”