Buckle Up. Everything Has Peaked

For the last few weeks at Catalus, the big topic of discussion has been about how bad markets across the board are looking, and about how its only going to get worse. A lot worse.

Everywhere you look, problems are brewing, with the biggest warning signals flashing from the credit markets. Everything ranging from Treasuries, to leveraged loans, to high yield are down significantly (the latter being at a 5 year low). Credit downgrades are at the highest pace since 2009 and by some measures high yield bonds are at 2009 levels. You can paint a prettier picture by stripping out energy, but the losses are still significant, and the leftover companies are the ones that benefit from decreasing energy expenses.

Corporate profits have peaked with margins and earnings down despite the decreasing energy costs. In the last few years profits have been driven by stock buybacks, cheap debt, M&A, and cost cutting. The first three will be choked off with contracting credit markets and rising interest rates, and there's only so much corporate fat you can eliminate before you cut to the bone. Meanwhile US wages are marching upwards and the dollar is relentlessly rising, which makes our exports progressively less competitive.

US housing looks OK, but not great. The prices in gateway cities have risen to stratospheric levels. They outperformed in the last market downturn, but the reverse will be true this time around. Some markets are substantially over supplied, like Miami, Manhattan luxury condos, and some parts of LA. We won't see a crash, but there will be a more typical real estate correction, with the hottest markets getting hit the hardest.

Outside the US, the picture looks even worse. Emerging Markets are struggling, with some of the major ones like Brazil and Russia in deep recessions. China is just muddling along despite the government's forceful efforts to grow, and Europe has stagnated since the last crash.

Meanwhile in the face of all this the Fed will likely raise rates.

What does a responsible steward of capital do? At Catalus we've been waiting for this type of environment for years. In the meantime we've seen many market participants make some incredibly risky bets that will surely unravel if our prognostication is accurate. There will be opportunities in 2016 to pick up cheap assets; we're eagerly waiting.

*Update 1/7/16: On January 6th, 2016 George Soros referred to the current environment resembling that leading up to the crisis of 2008.  Let's hope that things don't get as dire as he predicts Soros Bloomberg Article.