Digest: 37% of U.S. Companies Could Go Bankrupt, Fed Report Finds

Plus, an Exodus of China’s Best and Brightest.

Welcome to the Sunday digest… my breakdown of the things we’re thinking about and talking about in the Global Intelligence world. 

First up this week, more than a third of U.S. companies are struggling to stay afloat… 

A recent study by the Federal Reserve based on 2022 data found that 37% of U.S. non-financial firms are close to default.  

The cause of this emerging debt crisis is the Federal Reserve itself. Over the past year or so, the Fed has pushed interest rates to 5.25% from just 0.25%… the fastest proportional rise in rates in U.S. history. 

With corporate debt at record levels in America, this has put U.S. firms under huge pressure. As their loans expire, companies are having to refinance at much higher rates… pushing them to the brink of collapse. 

This is not normal… 

As the Fed report notes, the proportion of firms in financial distress “is higher than during most previous tightening episodes since the 1970s.” 

The report concludes: With the share of distressed firms currently standing at around 37%, our estimates suggest that the recent policy tightening is likely to have effects on investment, employment, and aggregate activity that are stronger than in most tightening episodes since the late 1970s… these effects might be most noticeable in 2023 and 2024.” 

In other words, the U.S. corporate sector is heading for choppy waters… likely even a wave of bankruptcies… starting this year. 

As I’ve been warning you for some time, debt levels in the U.S. are simply too high—not only in the corporate world, but among consumers and the government as well.  

With today’s higher interest rates, a monetary crisis is brewing, one that threatens to upend the entire U.S. economy. 

This is why I own non-dollar assets such as gold, bitcoin, and safe-haven currencies like the Swiss franc… and why I suggest everyone do the same. They’ll help protect and even grow your wealth in the monetary realignment that has to happen. 

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Next up, Mastercard makes a big leap into crypto… 

On June 28, Mastercard announced its new Multi-Token Network, or MTN. The platform is specifically designed to handle transactions involving digital assets on the blockchain (the secure ledger technology behind bitcoin and all other cryptos). 

The beta version of the MTN will be available in the U.K. this summer, with financial institutions, financial technology companies, and central banks all expected to test it out.  

According to Mastercard, digital asset and blockchain technologies will soon become the gold standard for how we transact globally. Among its many use cases, MTN will help make cross-border payments more efficient and cost-effective, prevent fraud through better identity protection, and manage supply chain transactions. And that’s just to start…  

Raj Dhamodharan, who manages Mastercard’s strategy and products in blockchain and digital assets, said MTN could handle payments for NFTs that in turn represent “any asset.” In order words, this network could be used to trade real estate, stocks, or any other assets as digital tokens. (NFTs, or non-fungible tokens, are one-off, one-of-a-kind cryptos that can be used to represent ownership of a unique, like a digital image or even a house.) 

I’ve been hammering home this broader point for a while now…  

As the mainstream media pokes fun at crypto and writes clickbait articles about its demise, major companies are investing heavily in blockchain technology behind the scenes.  

Mastercard, a nearly $400 billion company, wouldn’t launch a major crypto network if it didn’t believe in this space at a fundamental level.  

We’re heading rapidly toward a future when virtually every transaction we make will occur on a crypto network. (I’ll be speaking more about the future of finance and crypto at International Living’s Ultimate Go Overseas Bootcamp this fall in Denver. Details here.) 

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Finally this week, China’s got a bad case of brain drain… 

Before the pandemic, China faced a trend of rising emigration. In 2018, it had net outflows of nearly 300,000 people, up from 125,000 in 2012.  

COVID travel restrictions pushed down those numbers considerably, but like a loaded spring, emigration has now shot back up. A U.N. forecast put net outflows in 2022 at over 300,000 again, after a net drain of about 200,000 in 2021. 

The most notable figure concerns the number of high-net worth individuals who are leaving.  

Net outflows of high net-worth individuals—those with more than $1 million in assets—were steady at around 9,000 a year for most of the early 2010s. But by 2017, that number reached 11,000 individuals, followed by 15,000 in 2019. Post-pandemic numbers are not yet available, but are expected to be in the 13,000 to 15,000 range. 

Those numbers may seem small, but these are net outflows, so the point is that China is losing more wealthy individuals than it’s gaining every year. This includes wealthy foreign talent. 

The megalopolises of Shanghai and Beijing have seen many foreign residents leave over the past decade, partly due to the fear of detention and investigation for what used to be considered routine business.  

Shanghai had only 163,954 foreigners in 2020, and Beijing only 62,812. That’s a drop of 21% and 42%, respectively, since 2010. 

Hiding behind all these numbers is a question critical to China’s future… 

How does a dictatorial government—so focused on crushing freedoms and controlling the minds of its people—retain its most fruitful market innovators and attract key foreign talent?   

China has enjoyed explosive economic growth over the past decades by focusing on basic manufacturing… 

Now, if it truly wants to challenge U.S. dominance, it needs to innovate… and that’s not an easy task when foreign talent doesn’t want to come and your wealthiest citizens are running for the exits. 

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website. 

Enjoy the rest of your Sunday.