The Fable of Fred and George, Two Contrasting Investors
Once upon a time, there were two investors, one named Fred and the other named George. Fred was a believer in the perpetual market boom theory. He was a risk taker, known for his quick trading decisions, always chasing the hottest trends. He firmly believed that no matter how dire the economy got, the Federal Reserve would always be there to bail him out.
George, on the other hand, was an old hand at investing. He had seen a lot - from the rapid bull markets to the catastrophic bear markets, and everything in between. He knew that like the seasons, markets too had cycles. George was a patient man, conservative in his investment approach, always prepared for possible downturns.
Then inflation became high, much more than the usual 2% benchmark set by the Fed. The markets were heated, with stocks and real estate prices through the roof. Fred, caught in the euphoria, continued to take on risk, piling on investments he considered 'too big to fail'.
But George, the wise investor, saw the signs. He knew that the higher the climb, the harder the fall. He started preparing for a market correction, made sure he was ready for the normal and inevitable market correction that was long overdue.
As George expected, the balloon of overpriced investments soon began to deflate. The markets experienced a major correction, causing panic among the investors. Fred saw his investments tumble as the markets went into free fall. His belief in the Fed's ability to bail him out started to waver, as the FED found itself in the position of fighting overheated inflation it had caused through many years of cheap money.
George, however, remained calm. His portfolio and the safe havens he'd invested in shielded him from the worst effects of the downturn.
In the end, Fred learned a hard lesson about the cyclic nature of markets and the perils of over-reliance on external interventions. George, meanwhile, weathered the storm successfully, his wisdom, and cautious approach proving right once again.
So, the moral of the story is: understanding and preparing for market cycles can provide a significant edge when investing, no matter what the broader economy is doing. Also, it's essential not to count too heavily on external factors or bailouts that might not arrive in time, or at all.
According to Moody’s, US Corporate Debt Defaults In 2023 Surpass Last Year's Total
Due to increased borrowing costs, experts have been predicting a wave of defaults to hit the economy for some time.
According to Moody's Investors Services statistics, at least fifty-five American-based corporations missed payments on their loans in the first half of 2023.
Just 36 businesses declared they would not be able to pay back their financial commitments to lenders last year, which represents a 53 percent rise in the total number of defaults.
The burden on credit-dependent enterprises has increased, according to Moody's, because of greater borrowing rates and stricter lending rules. There were 16 corporate debt defaults globally in May alone, up from 12 in April.
Borrowers now have fewer options since they lack the funds to pay off their creditors, making it more difficult for them to refinance previous loans or allow their debt to mature due to economic instability and increasing interest rates.
By making it more difficult for corporations to repay their loans, the Federal Reserve's aggressive monetary tightening measures have played a significant role in driving many of them into default.
The situation has worsened as a result of the rise in interest rates and the growing number of banks that are reluctant to make new loans following the regional bank crisis this spring.
Pete St. Onge, an economist at the Heritage Foundation, recently stated in a podcast that
"Banks are battening down the hatches, hoarding their bailout money instead of lending it out."
"That credit crisis implies that in addition to bankruptcy filings, which occur during recessions, we also see a lending wall that isolates even healthy enterprises. Naturally, their occupations are lost with them”.
Loans Harder to Get Since Recent Bank Crisis
Mohsin Meghji, chairman of the restructuring consultancy firm M3 Partners, told CNBC on June 24 that "capital is much more expensive now."
"Consider the expense of debt. Over the past 15 years, you could typically obtain loan financing for 4 to 6 percent at any time. The cost of debt has now increased to 9 to 13 percent, he said.
In the meantime, Bank of America cautioned in May that a full-blown recession and a harsher lending climate may lead to defaults on corporate debt of close to $1 trillion.
According to Deutsche Bank, total loan defaults in the US might reach 11.3 percent in a credit crunch, just shy of the record-breaking 12 percent observed during the Great Recession.
Corporate Defaults are expected to reach an all-time high.
With 81 companies failing to pay their bills in the first half of 2023, U.S. corporate failures make up the majority of all defaults globally this year. - Zero Hedge
Meanwhile, What Is the Oracle of Omaha Up To?
According to CNBC, the cash hoard at Berkshire Hathaway swelled to almost $150 Billion at the end of June. This is near a record high, much higher than the $130 Billion at the end of the first quarter. (Sounds like George in our earlier story).
Could Mr. Buffett believe that there will be attractive investment opportunities in the future - like a major market correction where prices of assets decrease substantially.
