The tide is turning on the stock market’s skinny dippers: My grandfather was a superb lawn bowler for one simple reason: he could wage psychological warfare on his opponents. This all started with his bowling posture.
Because of his shaky stance, he had to bowl between his legs without bending his knees — enough to frighten anyone standing behind him.
But his favourite and most terrifying taunt were accusing opponents of “thin dipping” as loudly as possible. Which, in this context, referred to bowling too narrowly and causing your bowl to cross by skating across both sides of the rink, which is allegedly impolite in terms of bowling etiquette.
A persistent stream of such comments would finally wear down the opponent, and grandpops, by name and nature, would more often than not bring home the prize meat tray.
Warren Buffett, another well-known investor, employs the skinny-dipping comparison as well: “Only when the tide goes out do you realise who's been swimming naked.”
Last week, however, the tide began to turn. And it revealed an unsightly sight. I won't remind you of the sea of red.
According to the Financial Times, the most exciting, showy, and optimistic bubble investors are returning to earth, while those with long-term, reasonable, and discounted investments are doing well:
Cathie Wood's flagship Ark fund is on the verge of being surpassed in the post-pandemic performance table by Warren Buffett's Berkshire Hathaway, marking a remarkable turn in fortunes between the two notable investors.
Now, doing as good as Buffett isn't such a bad thing. But it's the basic concept that's important here. It's a tale of the tortoise and the hare. Growth and technology companies surged and burst, while value stocks steadily rose. They both ended up at the same place in the end.
But there might be an even better method to get away from our money.
But what exactly is this tide I've been talking about? What is the stock market's equivalent of skinny dipping?
We may have given up much of the government's central economic planning during the last 80 years. Still, one critical point of government meddling persisted—that of monetary policy, which is referred to be “policy” for a purpose.
The price of money – the interest rate – is still under the authority of central banks. They determine a free-market price, with savers and borrowers striking a balance for lending and borrowing money.
We've seen the same crises and problems that you'd expect to see in, for example, the power industry if the government regulated the price of electricity.
Oh, no, that's not a good example. But you get the picture.
Central banks produce financial system booms and busts by tinkering with prices, just like Ofgem does with energy prices. As a result, enterprises in the two industries have a history of facing crises and going bankrupt, much like other government-run industries in the past.
Central banks, unlike Ofgem, can conjure up money to bail out banks that require it regularly. That is a power that governments are increasingly using over their finances.
But let's get back to skinny dipping.
The interest rate is the tide that has shifted. Central banks are eventually expected to hike interest rates due to inflation. And this means that all of the corporations who went on borrowing sprees during the last few years of low-interest rates may find themselves with a more significant interest bill than they can afford.
They may become corporate zombies, which means they cannot pay their debts but can continue to borrow to keep the loans rolling over.
According to S&P Global, borrowing has increased significantly as a result of the current lax monetary policy:
According to LCD, rated US corporations issued $2.122 trillion in bonds in 2020 to compensate for the pandemic-induced income deficit. The annual total was increased 59.7 per cent over the previous year. Companies issued bonds at historically high levels in 2021, totalling $1.417 trillion as of Sept. 15.
A 60% increase in borrowing to compensate for lost revenue? Does that sound like a decent plan?
In contrast, the stock market insists that it wasn't. This is because interest rates are currently rising. And some of those businesses will be unable to repay the debt before the interest bill skyrockets.
Of course, it's not just businesses that have gone on a zero-interest-rate borrowing spree. However, corporate borrowers are publicly traded on the stock exchange, and their shareholders suffer the most if the bonds default. As a result, share prices have plummeted, particularly among corporations with insufficient revenue to cover the debt. That is tech stocks with hazy promises of future revenue streams that are never more than a few months. Years away.
Still, consider some other borrowers who would have difficulties if interest rates climb.
“Red-hot housing market fuels record mortgage borrowing,” according to Fox Business.
In 2021, lenders were expected to provide $1.61 trillion in purchase mortgages.”
“Private equity sidesteps IPO parade by borrowing billions,” according to the Financial Times.
“CLOs Wrap Up Record Year,” Wall Street Journal, with “Bundles of low-rated corporate loans have been one of 2021's top-performing debt investments.”
According to Bloomberg, “Consumer Debt in the United States Surges by a Record $40 Billion,” Additionally, the estimate is “almost two times the median value” in the survey.
Investors are wondering who will go bankrupt first. It was the savings and loans (S&L) crisis in the 1980s. Many (but not all) Asian countries and corporations were involved in the 1990s. It was technology stocks in 2000. It was mortgage-backed securities holders (and some issuers) in 2008. It was some European governments in 2012.
However, this method of thinking maybe overlook the forest for the trees.
Do you believe governments will allow large corporations to fail? Or what about mortgage holders? Or anyone else?
I mean, if we can battle a pandemic by running massive deficits and printing money, why couldn't we combat a financial crisis?
We can and will do so. It will be done at the expense of our money's value. As a result, the gold price remained stable during the current market turmoil, even though increased interest rates were blamed for the drop.
Editor, Fortune & Freedom
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