• Christian Armbruester

The Last Mushroom



Why the credit markets are akin to an over grilled vegetable.


We were able to go out for dinner with the whole family the other week. The attraction of this particular restaurant is that food is brought raw to the diners, who can then grill everything on a small stove in the middle of the table. The kids love it, because they can play with their food, and who is to argue when they finally eat what is put in front of them? As it happens, we were all very hungry, so we ordered plenty, yet still the battles for this preferred piece of beef or that favourite bit of corn were as ferocious as ever. And then as if by magic, everyone got full. All was eaten, except for a mushroom that had probably now been on the grill far too long.


You simply could not get anyone to eat that final piece of vegetable. No coaxing, no amount of encouragement, none of us could be bothered to put the final bit of food out of its misery. That’s precisely how I feel about the credit markets these days. No matter how I look at it, and as much as I like lending, just the thought of giving anyone my money entails some serious stomach pains these days. There are rather obvious reasons as to why.


When real interest rates for government debt are negative on the short end, and the long end comes with massive inflation risk, there is not much to get excited about. Corporate bonds are a bit more interesting, but here we are faced with a question of the haves and the have nots. The fault line is the historically wide difference in yield between BBB versus BB debt. On one side of the border, debt is available in record abundance, but interest rates are very low. On the other side, the defaults are high, but the yields are still very low. Either way, not really an appetising proposition.


So, what else is there? There are the private markets, whereby you lend money to whomever you want with a bespoke contract and it is either senior secured or junior (which is essentially unsecured). Big difference, and many are finding it quite disheartening when they find out that the security one may have thought to have held, is worth a lot less, when you can’t get your hands on things immediately. Tail risk, black swan, whatever you wish to call the economic fallout thanks to the on-going battle with a virus, one best makes sure not to have too much exposure to things going horribly wrong. Lending it seems is not what it used to be, and credit risk may well be the least of our problems. Mushroom, anyone?

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