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Branzan Advisors Commentary | August, 2023

August 16, 2023

We are investment professionals. Many of us started our investing and business careers in our childhood. Whether that was buying donuts wholesale and selling them retail on our weekly ski bus, running a lemonade stand or buying and reselling KBCO Studio C CDs online (this probably doesn’t mean much to anyone outside of Colorado), we've always been interested in business and investing. That said, we are not economists. However, it's perilous to invest without considering what is happening in the economy.  We spend time every day thinking about where the domestic and global economies are heading, the likely impact on our investments and where opportunities will be down the road. What we see today is more confusing than ever.

Interest rates have increased at a clip reminiscent of Volcker’s inflation-fighting days.  We believe we are just starting to see the effects of higher interest rates, particularly in certain areas of real estate. Corporate bankruptcies are spiking. Consumer credit card debt is skyrocketing.  However, when we go to restaurants in Denver, everything seems fine. In fact, it seems better than fine; it seems like people are doing very well and spending money freely. Needless to say, it's very confusing and difficult to understand where we are heading.

We believe difficult times lie ahead, resulting from the increase in the price of debt. There is a lag between the time when the Fed raises rates and the economy reacts. We expect there will be more stress in the corporate loan and bond markets as companies are forced to refinance maturing loans at much higher rates. We also anticipate more stress in the commercial real estate market as existing low-rate loans mature and borrowers are forced to refinance at materially higher rates. We believe the next 12-18 months will result in some compelling opportunities to acquire excellent real estate properties that have fallen victim to bad capital structures.

Our concerns don’t stop with higher interest rates. The United States has disregarded, or ignored, its role as an energy superpower and continues to draw down the Strategic Petroleum Reserve for political purposes. The U.S. Strategic Petroleum Reserve is at a 40-year low. Oil is now close to$80 per barrel and it will be much more expensive when the U.S. begins to refill it, if it is ever completely refilled due to political wrangling. The number of drilling rigs operating in the U.S. has dropped by 14% in the past year. With less domestic supply coming online and continued output cuts by OPEC+, we believe even higher oil prices are likely.

We are just scratching the surface of things that concern us. We could go on about excessive U.S. debt levels, challenges to the reserve currency status of the U.S. Dollar, bank insolvency, foreign wars and political uncertainty, but we will save those uplifting topics for a future letter.

While we see plenty of risk on the horizon, we also see opportunities for those willing to think outside of normal investment parameters. Thinking (and investing) outside the box is why Branzan was founded over 21 years ago and it continues to be our mission going forward. As risk managers, we must keep our eye on what could go wrong and try to avoid the pitfalls. However, we realize that dislocations create opportunities and we expect to take advantage of them.

We appreciate your continued confidence in our firm and our investment strategies.  

Branzan Investment Advisors


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