The Everything Bust. Causes, Consequences, and Profit Opportunities. Mike Larson Senior Analyst

Transcription

1 The Everything Bust Causes, Consequences, and Profit Opportunities Mike Larson Senior Analyst

2 The extremely favorable (and arguably artificial ) market environment that lasted from March 2009 through January 2018 is changing Monetary/fiscal policies are increasingly diverging, the split between winners and losers is growing, and cracks in the market façade are widening Herd-like investor behavior, record-high levels of risk-taking, extreme overvaluation in multiple asset classes, and more suggest we re near an important turning point The bottom line for investors like you?

3 If You re Following the Pre-2018 Playbook...

4 What is the Everything Bust?

5 Let s Look at What Got Us Here First Major CBs embarked on unprecedented QE in the U.S., Europe, Japan, U.K., China, Sweden & Switzerland Collective balance sheets swelled to $20 TLN+, 4X pre-crisis levels CBs worldwide also cut interest rates a total of 667 times in the postcrisis period

6 In all of history, the Fed NEVER even came close to printing this much money!

7 Nor in all of history did the Fed ever keep rates this LOW for this LONG

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9 What were the consequences? These policies destroyed the rational, traditional way of valuing assets and ignited the biggest speculative orgy the world has ever seen! Unlike the late-1990s (when the bubble was largely confined to tech stocks) or the early-2000s (when it was largely concentrated in housing), this bubble has infiltrated virtually EVERY market EVERY place Stocks of all types... Bonds of all kinds... CRE and housing... Modern and classic artwork... Baseball cards, Billionaire s Row penthouses, garbage IPOs... The list goes on and on!

10 Stocks (Almost) the Most Expensive Ever By One Key Earnings Measure At 33.3, the S&P CAPE ratio is almost DOUBLE the LT average of 16.8!

11 Stocks are the Most Expensive Ever When Measured Against Revenue

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13 But It s Not Just Stocks! House Prices Have Also Taken Out Their Bubble-Era Highs

14 Presenting 1375 Bird Ave. in San Jose 42 yrs. old, 1,066 SF, burned out and uninhabitable Asking price of $799K in April 2018 Sold for $938K, 17% over asking, in 25 days; $880/SF SF prices overall were recently rising by $561.64/day, or $23.40/hour... NUTS!

15 CRE Prices Also Soared to All-Time Highs Thanks to the Ceaseless Search for Yield

16 Investment Bankers and Corporations Have Gone Wild... Again! Total corporate debt hit $6.1 TLN in late 2017, up 84% from a decade earlier; Higher-risk leveraged loan borrowing at all-time records M&A Mania: Deal pace at record, deal funding forecast to +23% YOY to record $250 BLN in 2018 SPACs (Special Purpose Acquisition Cos.) raising record $$, topping credit bubble peak P/E firms paying all-time record multiples to EBITDA 11.2X in 2017 vs. 7.7 in 2009

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18 Corporate Debt Now at its Highest Level Ever Relative to GDP

19 Higher-Risk Leveraged Loan Volume is Surging Annual issuance, Source: WSJ, 8/6/18

20 SPACs: No plan? No financials? No history? No problem!

21 Companies, P/E Firms Using Cheap Debt to Overpay Wildly in M&A Transactions

22 Debt Protections for Investors Disappearing Amid Risk Appetite Surge

23 Even Junk Countries Went Nuts Feeding at the Cheap Debt Trough!

24 EM Companies Now Owe $2.8 TLN in USD- Denominated Debt, 2X Pre-GFC Levels!

25 Yertle the Turtle Behavior Sets Stage for a Debt-Driven Wipeout Turtle #1 Making high-risk loans to high-risk companies Turtle #2 Adjusting earnings to make numbers look better Turtle #3 Not requiring borrowers to meet certain covenants Turtle #4 Charging record low spreads and rates Turtle #5 Originating record volume 9+ years into an epic easy money cycle

26 Bubble to Bust Transition Getting Underway

27 The Fed is Now SHRINKING its Balance Sheet

28 Rates are Rising Fast; 5s at 9-Year High 5-Yr. Treasury Note Yield

29 The Yield Curve Has Collapsed to 11-Yr. Lows

30 DXY Soaring, Vaporizing EM Borrowers! U.S. Dollar Index (DXY)

31 Bull Market? WHAT Bull Market, Turkey Edition TUR (Weekly)

32 The Credit Cycle is Beginning to Turn

33 The Credit Cycle is Beginning to Turn More banks are tightening CC standards than at any point since the last two recessions

34 The Credit Cycle is Beginning to Turn

35 So, Here s The Bottom Line... We are not shy at Weiss Ratings When it s time to shout Get the heck out! we do We did it in late 1999 ahead of the Tech Wreck, when we rated 99.3% of Nasdaq stocks SELL We did it in when we saw the housing bubble beginning to burst And we re near that point again as the Everything Bust is beginning to unfold

36 This is how Weiss Says SELL!

37 So, Here s The Bottom Line... If you re invested in stocks, cut your overall exposure; I just slashed my 401(k) stock allocation to its lowest level in several years Re-allocate to safer, higher-rated stocks in sectors like utilities, (select) REITs, staples; Recent sector outperformance should persist Use inverse ETFs and put options to further hedge risk or target downside profits Financials, tech, materials, industrials look the most vulnerable to me

38 For More Information and Ongoing Picks... Safe Money Report, monthly newsletter Supercycle Investor, investment service Call and ask for the MoneyShow San Francisco rate of $78/Yr. for SMR, $1,994/Yr. for SCI Weiss Ratings Daily Briefing, free 3X/week letter available at