Kevin O’Leary Expresses Concern Over Emerging Crisis in the US
In a recent interview on Fox Business, Kevin O’Leary, the renowned entrepreneur and television personality, voiced his apprehensions about an impending crisis in the United States. The discussion revolved around the outlook for small and mid-sized businesses, which O’Leary frequently interacts with due to his entrepreneurial endeavors.
When asked if these businesses were becoming more optimistic about the economy, O’Leary responded with a sobering perspective. “No, that’s not what I hear, and I live in the real world,” he remarked.
O’Leary’s primary concern revolves around the escalating interest rates and the potential ramifications of further rate hikes. He worries that these increases in interest rates could push many businesses, especially smaller ones, into deep financial distress.
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Small business optimism has shown a slight uptick recently, with the National Federation of Independent Businesses’ Small Business Optimism Index rising by 0.9 points in July, reaching 91.9. However, this figure still falls short of the 49-year average of 98, indicating a lingering sense of unease within the small business sector.
Despite this modest improvement, O’Leary firmly believes that the numbers obscure a more significant issue. He points to the Federal Reserve’s 10 consecutive interest-rate hikes since March 2022 as a cause for concern. “These rapid rate hikes that have occurred and the unprecedented speed of these hikes have put my small businesses [in a difficult position]… The cost of capital has gone through the roof,” he remarked.
O’Leary highlights the vulnerability of smaller companies in particular, contrasting them with larger enterprises listed in the S&P 500, which have relatively easier access to financing. “If you’re in the S&P 500, you have no trouble financing your business,” he noted, “You can’t say that about small businesses anymore.”
This concern is not without foundation, as small businesses with five to 500 employees represent a substantial 60% of the U.S. economy. Therefore, any liquidity crunch in this sector is a matter of national concern. O’Leary foresees a looming crisis, particularly when the Fed contemplates another 50-basis point rate increase.
Analysts at Morgan Stanley echo O’Leary’s concerns, speculating that companies with weaker credit ratings could be the hardest hit by prolonged higher interest rates. However, the risk of financial strain applies to businesses of all sizes operating on narrow profit margins. For those that have borrowed heavily in the past, the rising cost of servicing their debt could potentially push them into financial losses.
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In recent years, some heavily indebted companies have barely managed to cover the interest on their loans, thanks to historically low interest rates. These so-called “zombie companies” are now teetering on the brink of bankruptcy, with bankruptcy filings surging by 15% year over year as of July.
In essence, all businesses face vulnerability due to the rising costs associated with servicing their debts. However, larger or publicly traded companies can tap into the stock market to raise capital, whereas small and family-owned businesses may find themselves with no recourse but to cease operations, liquidate assets, or declare bankruptcy.
To mitigate this crisis, O’Leary suggests that some small businesses should explore government tax credits and support programs. He specifically mentions the Employee Retention Credit, which could provide a lifeline for businesses struggling to meet payroll and avoid layoffs amid the recession and credit crunch.
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In summary, Kevin O’Leary’s concerns about an emerging crisis in the United States stem from the rapid rise in interest rates and the vulnerability of small businesses, which form a substantial part of the nation’s economy. As interest rates continue to climb, the potential consequences for businesses of all sizes are a matter of growing concern.
