Leverage Economics

Interest rates are to asset values what gravity is to matter. But the level of rates is the consensus obsession; the variant is the structure of a business's funding.

Minsky's three regimes make the point. A hedge unit covers principal and interest from its own cash flow. A speculative unit covers interest but must roll its principal. A Ponzi unit must borrow simply to pay interest. As a calm period lengthens, the whole system drifts from hedge to speculative to Ponzi, because stability itself breeds instability. A higher-for-longer regime does not create that fragility; it reveals it.

Leverage is a lever, and the cost of capital is the fulcrum. Move the fulcrum a few inches, say 200 basis points, and the same debt load that once amplified returns now amplifies distress. Nothing about the borrower changed; the mechanics did.

Or take Buffett's tide: cheap money floats hedge, speculative and Ponzi boats alike. Only when it goes out do you discover who was financing long-duration assets with short-duration money.

This is a winner-takes-all landscape. Firms with cheap, committed, long-duration capital compound, while over-levered peers spend their cash flow servicing the fulcrum and are forced sellers at the worst moment.

Markets re-price the level of rates quickly, but they are slow to re-price funding fragility: the maturity walls, the covenant terms, and the feedback loop between a falling share price and a rising cost of capital. That is where we look. We assess where a business sits on Minsky's ladder and weigh the structure and duration of its liabilities, not just its earnings.