The FED expects to make three hikes in interest rates in the next 12 months. Growing interest rates lead to higher costs of debt. This in turn reduces the ability of companies to raise capital for new build, recruitment and especially R&D and Innovation. Thus rising interest rates tend to suppress growth in the economy.
Let us categorise companies into three groups. The first “Strong” group can cover both the principle and interest out of annual cash flow. The second “Speculative” can cover just the interest out of cash flow. And the third “Threatened” can cover neither obligation out of cash flow. Recent research by Bianco Research LLC has recalibrated the “Threatened” more tightly to focus on those companies whose interest costs were more than 3 times their profits – a measure of extreme indebtedness.
Today, by this measure, we have the largest crowd of companies at threat in the last 30 years.
This is a serious situation. As interest rates rise even more companies will be caught in the “Threatened” category. Many will be forced to sell assets to meet their debt obligations and this may lead to a collapse in values and a correction in the market. This may be the harbinger of the crash being talked about.
Mr. Buffett’s Berkshire Hathaway now has 20% of its total assets in cash. He is readying his brilliant operation to take advantage of an impending downturn as he watches interest rates rise.
Perhaps you should ask your financial advisors what they think.