Smart money is not sitting idly right now. In fact, though money managers usually take summers easy and leave their trading desks to enjoy the Amalfi Coast or the French Riviera, some billionaires are out there raising money during this off-season.
They’re not looking to cash in on the U.S. equities bull market, which many of them believe is almost over, but they do see a mother lode opportunity with the coming default cycle on bonds and loans.
Just think about what the Federal Reserve is essentially up to – they’re NOT buying bonds and stocks anymore, they’re shrinking their balance sheet, and they’re raising interest rates.
In other words, they are about to punish every enterprise, company, and business, which has thrived on the back of zero interest rates and easy-money policies.
While the mainstream media is busy reporting on non-essential topics, such as the latest scandal in Washington, millions of jobs, billions of dollars, and trillions in equity, are at stake.
The world of investing is pivoting towards one, which relies less on humans when it comes to computing and quantifying, but CEO’s are still making capital allocation decisions based on emotional motivators, not purely mathematical ones.
While Portfolio Wealth Global sees a surge in artificial intelligence, machine learning, and index investing in the future, marginalizing the role of human money managers, since 94% of them are already underperforming the general S&P 500, we will continue to be exposed to the ebbs and flows of cause and effect relationships between lousy decisions made by human and their inevitable consequences, or the flip side, which is the above-averaged rewards that stem from superior insight.
It is futile to think that super-computers will take over all jobs, but they will certainly disrupt occupations, whose sole purpose is to figure out calculations.
Once machine calculations are done, though, humans will continue to act on this accurate data.
In other words, the future holds LESS room for human error, but it doesn’t do away with it, completely.
During the past nine years, with ZIRP in place, many CEOs, across the globe, have willingly participated in the greatest financial experience of all times, Quantitative Easing, and Portfolio Wealth Global forecasts that some of them will become guinea pigs in its downfall.
As interest rates rise and profit margins shrink back to normal, many corporations will have to deal with challenges that adding more debt will not solve.
Though financial conditions are improving for Main Street, the sugar daddy, in the form of the stock market, has shed $10T worth of equity in the past six months alone.This means that CEOs will not look that brilliant buying back shares of the companies anymore, and the ugly truth about their real earnings will come to light.
Again, as banks tighten the noose around borrowers, I expect a wave of delinquencies with auto loans, credit card loans, corporate bonds, junk bonds, and even government bonds of weaker hands.
Courtesy: U.S. Global Investors
It’s a snowball effect because when one company begins to default, others depend on it and experience losses as well.Previous bear markets have shown that a 30%-55% drop is possible.
So, in light of this, the Debt Vultures are roaming the financial markets, raising capital, cashing-up for the days when distressed assets will sell for liquidation costs.
One of my own businesses revolves around a real estate niche that is designed to target distressed homeowners and offer them a creative solution for their situation – I can tell you that there is no better environment to operate in, as an investor, than with Forced Selling scenarios.
Truly, that’s the only way to buy at bargain prices, so smart money is gearing up for such a financial landscape, right now.
They see exactly what we see – higher rates will lead to more delinquencies, which translate to layoffs, a market correction, margin calls, and bankruptcy auctions – it’s a snowball and is the typical ending to an over-heated business cycle, when people make irrational decisions, thinking the good days will last forever.
Watch for signs of trouble, and start to build a cash position to capitalize on this wealth transfer.
Research Partner, PortfolioWealthGlobal.com