The Credit Is Over, The Party Begins
A fund manager tells us when he thinks the next recession will come
It is a truism that central banks control markets. They act as alchemists without regard for the common good. They are responsible for printing money, generating a false sense of wealth. Moreover, when this expansion of money takes place, interest rates are lowered so that ordinary citizens can use it.
In this way, citizens have money to spend on all kinds of liabilities that generate an adrenaline rush at the moment of purchase and turn into debt after a week.
The more conservative try to invest it, encouraged by their neighbor, or abnormal market returns in recent years. The latter group is the type of investors who invest purely based on yield and who, as a rule, jump on the bandwagon in the last phase of the cycle when the final sprint occurs.
This unprecedented expansion of money generates inflation, which ordinary citizens suffer every time they fill the shopping cart or go to the supermarket. This is because, as we mentioned before, free money has a kick at the moment, but it becomes a burden after a few months/years, and we are all paying dearly for it.
The Fed has realized that the solution proposed just two years ago was unsustainable. This situation has reduced the most significant monetary expansion of all time in just four months. We already know what happened when it did the same after Covid.
On top of all this, Powell has announced three rate hikes in 2022 and another three rate hikes in 2023. Just a few months ago, there were doubts about tapering, and today we have this situation. It seems that we are beginning to see the wolf’s ears.
The first to be affected have been high-growth companies, which have seen their multiples fall by 30–60%. These companies are valued based on 10-year market expectations.
On the other hand, the indices are near all-time highs, but we must put this in context, and that is because a few companies are sustaining it. The vast majority are well below their averages.
The giant whales have already exited the market and are waiting to fall. Of course, no one has the crystal ball, but the credit cycle is elementary to measure over months, and the retail investor can benefit from this.
Puru Saxena has already made public when he believes this downturn will occur:
“Today, credit is expanding, yield curves are steep in many nations and retail investors are still nervous about the stock market. Furthermore, if our assessment is correct, the ‘mature bull’ phase is still several months away and the next bear market will probably arrive in 2–3 years.” — Puru Saxena
We continue to maintain a fully asymmetric portfolio. Minimal risk, and we will benefit from any market situation. We will capture this last sprint while protecting ourselves very cheaply against possible market swings.
In the last 50 years, there have been seven falls of more than 20%, and they have always been a few years after interest rate hikes. As we can see below (in red the recessions), the main recessions occur after an excessive rise in interest rates.
Valuations are higher than any year before, which means that declines may be commensurate with the disproportionate valuation of the companies. Whether or not you benefit from this opportunity is up to you, but you should be very cautious about how you do it.