Michael Tennenbaum on Fed Policy and the Outlook for the U.S. Economy

Michael Tennenbaum of Tennenbaum Capital Partners appeared on Bloomberg Television’s “InsideTrack” this morning with Deirdre Bolton to discuss Federal Reserve policy and the outlook for the U.S. economy and the distressed debt market.  Tennenbaum said that he is “not a fan of QE2,” that there “has to be a reckoning” and that it “would be good if the people of America started to elect politicians who want to play well with others and address the real needs of our country rather than political short gains.”

Here are the key highlights from the interview, courtesy of Bloomberg Television:

On where the pockets of capital seem to be needed most:
“In the middle market.  The access to the high-yield market has been limited to larger companies.”

On hotspots he sees right now:
“It’s hard to do that because the leverage lenders in the high-yield market have become so generous.  There’s an atmosphere that harkens back to 2007 and I think those areas have become overheated which will create future problems because the economy is not as strong as people think.  Household income is not growing very rapidly and we have this wall of debt–this big hangover from the big recession–and it’s just going to spread the problems over the next few years.”

On the wall of debt in leveraged buyout land:
“It has hit and the consequences have been spread.  The outlook–when I was here a year ago, I talked about this looming maturity wall–and it’s been mitigated by the availability of leveraged loans and high-yield debt.  Nonetheless, there’s still $300 billion of high-yield debt and leveraged loans coming due over the next two years.”

“Some of [the $50 billion] is gone because of recapitalizations outside of bankruptcy and some of it is pushed to the future through the generosity of lenders.  Unless the economy grows a lot more rapidly than we think it will, it’s just going to mean instead of two years of a lot of recapitalizations, it will be four.”

On California:
“Clearly it is a distress borrower.  There are a lot of obligations included unfunded pension that the state has and it’s a victim of its own success.  It creates a sanguinity, but we all have to pay our debts.”

On municipal debt as a distressed asset:
“Clearly a lot of us are looking at that now.  And it can be part of your portfolio planning, but this the portfolio planning season.  When we start out at the beginning of the year, most people don’t allocate their portfolios in a rational way.  They might lump all bonds as being bonds, where as you have distressed bonds and safe bonds.”

“It would be good if we consolidated local, state and federal when we look at obligations and revenues because there is only one pie.  Ohio State Endowment Fund has a very talented investment manager, Jonathan Hook.  Hook allocates his portfolio by market exposure, balancing and inflation hedges and then value added.  This is a much more sensible way than just stocks and bonds.  So if you’re going to look at municipal bonds and you look at a distressed municipal bond, you would want to put that more in the value-added category.  This is the prediction season and people are allocating portfolios and trying to predict stocks and bond prices and it’s almost impossible to do that.”

On inflation, QE2 and the health of credit economy:
“I have not been a fan of QE2.  There’s an old saying–in economics you can’t push on a string. The real central facts of our economy are household income and spending.  Even though that may grow at a 3% rate now, and there may be another 2 or 3% of inflation–some people don’t believe that.  It’s still not enough to work their way through the wall of debt that’s coming through.  There has to be a reckoning.  This is not an infinite demand for debt and other countries have demonstrated that.  It would be good if the people of America started to elect politicians who want to play well with others and address the real needs of our country rather than political short gains.”