Expert: Corporate Debt to Cause Next Crisis

Recession on horizon

Image Credits: Chris Potter.

Former Deutsche Bank trader Greg Lippmann is best known for having worn t-shirts with the logo “I am short your house” just before the financial crisis hit, and the US housing market imploded (making Lippmann very rich in the process).

Logically, he is also very well-known for designing the trade against subprime mortgages that became known as the Big Short.

Well, Greg “The Big Short” Lippmann is back with a new warning, telling Bloomberg that the next crisis will emerge from corporate debt (hardly a surprise to regular readers).

Speaking at the Milken Conference, the former MBS trader who now runs his own, $3 billion hedge fund LibreMax Capital, told Bloomberg’s Erik Shatzker that corporate debt and equities will face the biggest pain when the next downturn comes; meanwhile unlike the last crisis, investments linked to consumer debt should be relatively safe as companies have been the ones gorging the most on the ultra cheap interest rates during the past decade (alas, this is yet another analysis that avoids the impact of student and auto loans, which have taken consumer debt to new all time highs).

“If the first quarter’s volatility is a harbinger of something bigger, I think that you’re going to see a lot more trouble in the corporate market and the equity market than the structured products market,” Lippmann said during a Bloomberg interview in Beverly Hills. “The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis, and I think structured products are not going to be the epicenter.”

Lippmann also predicted that while the next recession may not be imminent, “it is on the horizon” and will be less severe but longer than the global financial crisis of 2008 and 2009. It’s likely to be more akin to 2000 through 2002, he said.

Of course, Lippmann has a reason to be bullish on structured products and bearish on corporates: he said that his fund has been heavily investing in other structured products such as commercial mortgage securities, collateralized loan obligations and student-loan investments. The fund has also shifted into the debt of some companies with exposure to real estate, such as homebuilders. One may almost call Lippmann “the big long.”