Austin, Texas – Happy Independence week! Here in the US, we celebrated with fireworks, family and fun for what is my favorite holiday of the year. Upon returning to the office, we were treated to some encouraging economic news on the latest job numbers, despite the Fed Chairman’s warning that interest rates will continue to rise (albeit at a slower pace). ISM manufacturing numbers held steady and construction spending came in well over expectations. So, is all back on track?

Recently, the Deputy Managing Director of the IMF, Gita Gopinath, gave a speech to the European Central Bank Forum warning that it may be impossible for Central Banks to raise rates high enough to actually end inflation. Gopinath warned that there are three uncomfortable truths about the current inflationary environment that have surprised Central Bankers:

1. Entrenched Inflation

• Despite the most aggressive rate hikes in 50 years, core inflation has not improved.

2. Weak Banks

• We have seen more bank failures in six months (in dollar terms) than the entire 2008 crisis.
• Governments, so far, have mostly been able to bail out interest rate hits on banks. Increased borrower defaults may amplify these bailouts to the point that the bailouts themselves will start generating fresh inflation pressure.
• Their solution: Let the entire banking system die, or print even more money, thereby creating even more inflation.

3. Potential Structural Decay

• Gopinath warns of “…structural changes affecting aggregate supply that could lead to larger and more persistent shocks.” In other words, the major economies of the world have become permanently weaker.

Why is this happening? Soaring regulations have crushed producers and the government stimulus has drained resources from productive businesses, while funding corporate competitors who can afford to lose money. Altogether, this hinders the small and mid-size businesses who actually grow the economy. For example, you could shop at Walmart or Amazon during the pandemic, but you could not shop at your local family-owned store.

According to Morgan Stanley, over $1.5 trillion of commercial debt will come due by the end of 2025. Will these businesses be able to pay higher rates on new and existing debt? For many, it is highly unlikely. In the interim, we at Next Frontier remain positioned in 100% cash, waiting hungrily for these distressed market opportunities. Our team has access to every commercial property loan in the nation and we are able to see the deterioration happening within the long portfolios of many banks. Every day, our team scours our local markets, and will continue to do so until the opportunities become lucrative enough for us to pounce on.

We look forward to serving as your guides through the incredible opportunity that lies ahead. Please reach out to a member of our team to explore our prior portfolio success and learn how our funds are designed to thrive on the road forward.