My Comments: We can argue ‘till we’re blue in the face about when this is going to happen and none of us will be right. Just know it will happen.
There’s a reference in Scott Minerd’s comments below about the Fed raising interest rates. Here is a chart I found some time ago that shows interest rate trends since 1790. 225 years and there have been only FOUR points that define the end of a downward interest rate trend. The last one is where we are today.
The last uptrend ran from 1946 through 1981. What this tells me is that for the rest of my life, interest rates are going to trend upward, and with that trend we’ll see all kinds of consequences. Like before, some will be good and some will be bad. Good luck.
Scott Minerd, Guggenheim Partners, April 6, 2018
Guggenheim’s head of investing sees a tough road ahead for the market and economy, with a sharp recession and a 40 percent decline in stocks looming.
Scott Minerd, who warned clients in a recent note that the market is on a “collision course with disaster,” expects the worst of the damage to start in late 2019 and into 2020.
Along with the decline in equities, a rise in corporate bond defaults is likely as the Federal Reserve raises interest rates and companies struggle to pay off record debt levels.
“For the next year … equities will probably continue to go up as we have all these stock buybacks and free cash flow,” Minerd told CNBC’s Brian Sullivan in a “Worldwide Exchange” interview. “Ultimately, when the chickens come home to roost and we have a recession, we’re going to see a lot of pressure on equities especially as defaults rise, and I think once we reach a peak that we’ll probably see a 40 percent retracement in equities.”
One of the main problems is that Congress and President Donald Trump have pushed through aggressive fiscal policies at a time when the Fed is looking to control growth with higher interest rates and less accommodative monetary policy.
Corporate debt currently stands at a record $8.83 trillion, according to Securities Industry and Financial Markets Association data. Higher rates will make it harder for companies to refinance and will put pressure on them once the stimulative effects of tax cuts wear off, Minerd said.
Once short-term rates hit 3 percent, that will be enough to drive up defaults and cause a recession, he added.
“As interest rates keep ratcheting higher, with record levels of corporate debt it’s going to be harder and harder to service,” Minerd said. “At some point, as the economy starts to mature and as cash flows start to stabilize and decline, it’s going to be difficult for everybody to pay this interest.”
“Defaults are going to be concentrated in corporate America, where in the past downturn they were basically focused in areas of consumer activity,” he added.
From there, Minerd figures the Fed will get involved, going back to the quantitative easing policies that helped pull the economy out of the last recession and pushed a surge in stock market prices but also coincided with lackluster economic growth.
“All that will do is defer the problem into the future and allow excesses to continue to build and the collision course that we’re on will just come later and probably be worse,” he said.