I don’t know if you’re a soap opera fan. But if you are, you’re probably familiar with “As the World Turns.” It had the second-longest run of any such show after all, airing on CBS for a stunning 54 years until it was cancelled in 2010.
Keeping up with all the twists and turns of the show, over the 50+ years was a daunting task for anyone.
But for investors like you, there’s a much more important (and potentially daunting) task if you want to be successful: Keeping up with the twists and turns of the credit cycle.
The credit cycle is one of the most important market drivers, bar none. When credit is cheap and easy to get, it propels asset prices higher and boosts the underlying economy.
When credit gets costlier and harder to obtain, it sends asset prices lower and hinders the underlying economy.
Think of your own personal finances. If you want to buy a house, you’ll probably need a mortgage. When mortgage rates fall, you can buy a more expensive house with the same monthly payment.
And when lenders are giving money away to other buyers with low credit scores or little down payment money, you’ll probably have to pay more for your house because of the increased competition from other home shoppers.
But when mortgage rates rise and lending standards tighten, the whole process reverses. Home prices slide, as fewer potential home buyers can qualify for loans, and those that do qualify can’t afford to pay as much because of the increase in mortgage payments.
Now imagine we’re not just talking about home mortgages. Imagine the same process playing out with credit cards … auto loans … commercial real estate loans … business loans … merger and acquisition loans … loans to fund stock buy backs … and so on.
You can see how tighter credit and higher interest rates on all those kinds of loans would impact stock prices and economic growth. And that’s exactly what I’m seeing in the credit markets today.
The massive flood of easy money that propelled stocks and risky bonds higher in price from 2009 through 2015 is starting to dry up. The credit cycle has turned for the worse.
So as an investor, you have to turn with it – or you’re going to get ran over. You have to maintain a much higher level of cash in your portfolio … sell or avoid high-risk stocks and bonds … and liquidate assets like commercial real estate that got overly inflated during the boom phase of the credit cycle.
There are plenty of other important steps to take at varying points in the credit cycle. There are also plenty of signposts to help you identify where we are in a given cycle. If you’d like to learn more about them, I suggest you try out my comprehensive course “How To Profit From Rising Interest Rates”. To watch the first session totally free, click here!
Until next time,
Mike Larson is a Senior Analyst for Weiss Research, and is also the editor of Safe Money Report and Interest Rate Speculator at Weiss. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.