A Credit Picker’s Market 

 

We’re dealing with a bit of mixed messaging in market-related news. It’s hard to tell what’s up and what’s down. Here’s our current state of affairs:

  • Banks are telling you to buy stocks. According to them, the bottom is in and they’re canceling their recession calls for Europe. Meanwhile, all of them are closing investments, departments & laying off staff.
  • After inflation, 62.2% of the stocks in the Russell 3000 are negative year-to-date on a real return basis.
  • Inflation expectations rise again to 4.4%, the highest we’ve seen since April.
  • Moody’s just placed U.S. debt on credit rating probation. One more false move and the nation loses its final AAA.

If your Spidey Senses are tingling and you’re wondering if the bulls are bears in sheep’s clothing, you’re not the only one. As the kids say, the math just ain’t mathin’.

Let’s take a closer look at what’s really going on and why it just might be a credit picker’s market. Of course, we’ll tie it all together with what it means for our fellow heroes on the journey.

 

Memes of the day

Meanwhile, at club Billionaire

If you’re looking for a crystal ball into our financial future, look no further than what the billionaires are up to.

All across the country, the richest in the nation have reduced their exposure to the stock market by what experts say is the most dramatic margin in years.

As of January, those with a million dollars or more in investable assets held more than 34% of their portfolios in cash, the highest level since 2002.

Wealthy investors in the U.S. have 23% of their net assets in publicly traded stocks, the lowest level of stock market exposure in 21 years.

Ultra-high net worth folks are following suit, including Warren Buffet. In the second quarter of 2023, Berkshire Hathaway added $17 billion to its cash reserve to bring the total cash balance to almost $150 billion.

While the talking heads preach a bull market, it seems as though the richest Americans are turning their attention elsewhere.

 

Surfing the Waves of Sea Change

​​​​​​Many investors look at 2023 and think things are humming right along. Consumers seem OK, unemployment is low, and we’re being told inflation is heading in the right direction.

These reasons signal we’ll get through without an economic impact from higher rates, but there’s risk in being backward-looking. Unlevered free cash flow is drying up for a large portion of businesses and the impact of higher rates have just begun to take hold.

In a recent podcast, Howard Marks and Armen Panossian of Oaktree Capital make the case for a major sea change headed our way and why it’s a credit picker’s market. Here are some gems from the conversation:

  • Low cost of debt = attractive to leverage. If you’re making an equity investment at a certain rate of return, invariably you can increase the expected rate of return by borrowing some of the capital.
  • Short borrowings cost less than long borrowings. People tend to borrow short to invest long. This is fine, except in those brief periods when financing becomes harder to obtain and you have a mismatch.
  • The S&P returned 10.2% each year for the last century. We can get returns like that from credit today.
  • Private credit has seen huge growth over the last 10 to 15 years. Many large private credit firms didn’t exist before the global financial crisis.
  • If you’re on the performing side, it’s a credit pickers market. High yield is the highest quality in 15 years.

If you’re a big business and have the benefit of time and fixed dollar liability for the next several years, you might benefit from inflation. On the other hand, smaller businesses are in trouble, as the cost of liabilities is rising in real time.

For cautious investors, 2009 to 2021 was a difficult period. Lending was penalized and we were in a full return world. We have normal rates today but we’re not in a low return environment anymore.

We’ve been on a good run and the mistake is believing it’ll continue forever. In recessions, the tide goes out and weak credit is exposed. The person who took less risk is rewarded.

 

The Return Journey is Worth It

The period behind us was unusually easy, and we all know what goes up must eventually come down.

If you’re basing your credit strategy off the past 15 years, it pays to be careful. Over the last three years, the money printer went full force and stimulus payments propped up the market. It’s just not sustainable.

On the hero’s journey, you’ll inevitably grow weary from climbing the mountain and falling back down. Learning hard lessons takes grit, determination, and inner strength. While it’s tempting to ignore that call to start a new journey, staying in the fight always unlocks brand new insights.

90’s music fans know that when you get knocked down, you get up again. You can never keep a real hero down.

If you need someone in your corner to cheer you on as you start a new leg of the journey, Dare Capital is ready to go. Our white label Back Room Service might be just what you need.

When you work with dare Capital, you’ll experience:

  • Greater income (a lot more)
  • Owning assets instead of commissions
  • Zero investment down
  • No personal liability
  • Fifty-fifty split on risks and profits

Until next time,

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