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Economy , Finance , Investing , Top

Bet Against Cheap Money

September 7, 2016

Yesterday, I talked about the cause of the next market decline: Cheap Money.

In a nutshell, people, companies, and governments have been able to borrow money very inexpensively.

This ability to get ‘cheap money’ has fueled the rise in prices of many assets. When everyone has lots of money, things get more expensive!

I mentioned several areas that have become inflated, like:

-The stock market
-Auto loans
-Student debt
-The housing market
-Company valuations

And then I broke up three groups of liabilities:

-People = Consumer debt
-Companies = Corporate debt / corporate bonds
-Governments = Bonds

I am speaking very broadly here, as there are obviously numerous ways we could look at this situation. Below, I have taken each of these three groups and offered one idea for how to profit when these liabilities go boom.

People (consumer debt).

The most obvious consumer debt right now is through auto loans. Due to extended terms on auto loans (up to 8 years!) and very low rates (sometimes less than 1%), lots of people have bought very expensive cars that they normally wouldn’t be able to afford.

I won’t dive too deep into this topic right now, but instead I’ll show you a company that is financing these loans: Santander Consumer USA Holdings Inc. ($SC)

This is directly from Yahoo finance:

Santander Consumer USA Holdings Inc., a specialized consumer finance company, provides vehicle finance and third-party servicing in the United States. The companys vehicle finance products and services include retail installment contracts, vehicle leases, and dealer loans. It also offers financial products and services related to motorcycles, RVs, and marine vehicles; originates vehicle loans through a Web-based direct lending program; purchases vehicle retail installment contracts from other lenders; and services automobile, and recreational and marine vehicle portfolios for other lenders.

Now let’s look at their stock price over the past several years:Looking at this chart, we can see that their stock price has fallen A LOT, which means a lot of other investors, noticed this car bubble issue last year.

The current price of $SC indicates the issues that many investors see with the company.

Maybe the stock will fall more? We could short the stock or buy puts (which would have been even better to do in June of 2015).

Companies (corporate debt).

This one is easy. I bet you could find a handful of companies that don’t deserve to be valued where they’re at.

Let’s pick the most obvious: Tesla.

Tesla’s market cap is $30 billion. Ford’s market cap is $51 billion.

There is no way that Tesla is worth even 1/10 of what Ford is.

Now, admittedly, a company’s market cap doesn’t necessarily have anything to do with its debt.

The point I’m attempting to drive home here is that companies, like Tesla, have taken on enormous investments (from investors who acquired ‘cheap money’) that they will not be able to pay back.

Governments (bonds).

This is a touchy topic here, especially when you talk about US bonds.

US debt is very expensive right now and it’s yielding almost nothing. So basically, if you buy a US bond then you are paying high fees for low returns. The trade off is that the investment is very secure, as most people call US bonds ‘guaranteed.’

(Honestly, if US bonds start defaulting, there will probably be much larger issues in the world.)

The idea is that rates should rise, as the historical yield of bonds are at their low… so it should now start to go up, right?

Well… I’m not willing to bet on that yet. Governments are doing crazy things, so we don’t know what the next chapter will look like.

But, if we did want to give ourselves some exposure, we could buy $TBT which “seeks daily investment results that correspond to two times the inverse (-2x) of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.” (from Yahoo finance)

This would be a good option in ‘normal circumstances,’ however we have no clue what the Fed will do later this year. Perhaps we’ll go the way of Japan with negative interest rates?Ok, I understand that a lot of this may be extremely confusing. (Ask whatever you want in the comments below.)

One thing that is not confusing is the investment thesis for gold. If any of the above debts start to crumble, gold is a sensible investment for anyone looking to secure their wealth without having to do any ‘double-reverse-psychology’ on the direction of stocks or the economy.

Another question you’re probably wondering is, “What will be the indicator that will signal that these debt issues are crashing?”

I’ll share a couple indicators we can look at, on Friday.