Bet Against Cheap Money

|, Finance, Investing, Top|Bet Against Cheap Money

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.

By | 2017-11-21T19:08:47+00:00 September 7th, 2016|Economy, Finance, Investing, Top|21 Comments


  1. Nate September 7, 2016 at 7:18 pm - Reply

    So what do you suggest for someone who has no wealth?

    • Cody Shirk September 7, 2016 at 7:37 pm - Reply

      Learn about how to take advantage of the next couple of years. There will be a massive flow of money; lots of people are going to lose a lot of their wealth, while a small group is going to make an enormous amount. You don't necessarily need any money to get involved.

      • Nate September 7, 2016 at 8:23 pm - Reply

        Would you at least point me in the right direction? I feel like I've belly-flopped into the deep end. Doesn't feel like I'm getting anywhere.

        • Cody Shirk September 8, 2016 at 3:27 am - Reply

          I know how it feels. It's like a catch-22.
          How do you invest money, when you don't have any?
          First you gotta make some money. It doesn't have to be a lot. Just a little. And then you need to be smart with it.
          I've written numerous articles in the past about different ideas... check 'em out.

          If you are able to wrap your head around what is going to happen in the next several years, you won't necessarily need much money to invest. Read as much as you can. Grab onto information like your life depends on it. Be balanced on what you read. Try to just consume facts; don't get swayed by biases. If you can be patient and disciplined (and understand what is going on), you'll do great. Trust me. You're not the only one who is in your position. Everyone is there, or has been there.

  2. Bernardo Vinhaes September 8, 2016 at 1:38 pm - Reply

    Is the logic behind negative interest rates, that it will motivate consumers to spend more? And how has that been working out? Because as I have been reading, there are other countries doing the same as Japan, and I don't see too much reasoning on the concept.

    • Cody Shirk September 8, 2016 at 2:11 pm - Reply

      You're exactly right... it hasn't been working out well.

  3. Ansh September 8, 2016 at 10:00 pm - Reply

    Cody - Would it be a mistake to buy property in London right now (I have been renting here for 7 years! )? Mortgage rates are at an all time low (1% fixed for 2 years then 3.69% variable) + UK government is lending 40% of cost of value interest free for 5 years.

    I personally feel London property market crash is imminent, prices have softened by 5% or so after brexit. But then given the BoE's loose monetary policy - the long awaited crash could be a few years away. In fact prices might increase due to 'cheap money'.

    • Cody Shirk September 9, 2016 at 2:08 am - Reply

      I have no idea. Really. I don't have a clue.
      I do know that London will always be an important location.

      It's a hard decision... many people are struggling with same thing here in the states. Property prices are high, but financing is cheap! But if property prices crash, then financing might get more expensive.
      I really don't have an answer... you probably have a better feel for the market than most.
      But remember... there is always another deal around every corner!

    • ansh September 9, 2016 at 11:59 pm - Reply

      Cody, .
      It is indeed a tough one.

      Speaking of other deals, you have so far recommended the following investments in other posts:
      1. gold/silver
      2. buying call/put options
      3. medical marujana stocks
      4. real estate in Colombia
      5. rare collectibles
      6. trade stocks

      how does one go about allocating capital to these categories?


      • Cody Shirk September 10, 2016 at 2:02 am - Reply

        Every person is going to have a different allocation.
        DO NOT go 100% into any of these ideas.
        Once you start digging in those areas, I think you'll find what you're comfortable with.
        Not trying to dodge the question here... but I cannot give individual financial advice.
        I'll have some more ideas soon!

  4. Mateo September 9, 2016 at 2:22 am - Reply

    What do you reccomend for me a kid (13 years) to do, I am willing to learn, and want to understand.

    • Cody Shirk September 9, 2016 at 2:52 am - Reply

      First: great job. I don't any 13 old who is even aware of this stuff. I wish I had taken an interest at your age.

      You should read. A lot. Start with the basics. Read "Rich Dad Poor Dad." When you're done with that, I'll give you more.

      Also, start working. Start saving. You'll be light years ahead of your friends by the time you are down with school.

      • Tom September 14, 2016 at 8:36 pm - Reply

        Cody, could you give a list of reccommended reading to understand the fundamentals around how to think about global-level economics concepts like investing in gold, or being able to read the market (what this series is about) or what it means for a country to be in debt - etc. etc. basically any economics beyond the heavily individualized "Invest in your IRA and watch your asset allocation"


        • Cody Shirk September 14, 2016 at 9:48 pm - Reply

          There are tons of books out there, but I'd recommend Jim Roger's books Adventure Capitalist and Investment Biker. These are two fun stories that weave economics in with macro views of the world. Jim is also a great story teller and one of the best investors out there (he founded the Quantum Fund with George Soros).
          The Creature From Jekyll Island is also a great book to understand money, the Fed, and how banking works.

      • Anonymous September 14, 2016 at 9:48 pm - Reply

        I feel like I could help here. I'm personally very young, only 14, from a young age my family set me up, suggesting books such as "The Prince", "Rich Dad Poor Dad", and "The 7 Habits of Highly Effective People". I started working with ecommerce only this year, with no help from my parents other than fifty dollars, and nothing more than that other than co owning a bank account with me.

        It's most definitely possible, and it took me a lot of time to begin choosing products, understanding markets, looking at information sheets, utilizing resources to get various information on any products (How many are being sold through eBay, percent of stock sold, unit price compared to selling price,) and you can find much more.

        You don't have to be a genius to make money while young without working, I was lucky enough to have supportive parents, even if they were fairly skeptical, it's been a blast having money whenever I need it, and being able to buy without really needing to ask for money.

        It was the best decision i've ever made in my short life.

  5. Mateo September 11, 2016 at 11:25 pm - Reply

    What are some things you think I could work as. Thank you by the way!

    • EAS September 13, 2016 at 12:06 am - Reply

      IANCD (I am not Cody Shirk) (:

      However, there's probably a lot you can do though this can depend on what country you live in and the culture thereof.

      Perhaps some of your neighbors would like to have their lawn trimmed and cleaned up of a couple times per week?
      If around your house you happen to have a DSLR Camera, perhaps you could pick up photography and after some time of learning begin offering your photography services to people for a fee.
      At this point in your life, what you exactly do to make some money is not extremely important*. What matters is that you begin to build up some savings now.

      *However, learning skills like how to code, or learning how to use programs like Photoshop etc. can be rather useful for your future (depending on what you eventually do).

      Also, while less related to this whole post, I'd advise you to really start considering whether you eventually want to pursue tertiary education. And if the answer is yes, then look beyond your own country for this education if you would go into debt studying in your own country.
      There are quite a few countries that offer University education for cheap or nearly free. Consider studying the language of one or more of these countries (don't always study a grammar book but also actually use the language [in real conversations!]) to increase your opportunities further.
      Even without considering the increase in formal education opportunities simply learning another language can increase your opportunities as you build connections with people you might not normally build connections with.

      Good luck.

  6. Alex Arvedahl September 15, 2016 at 9:28 am - Reply

    Do you believe US will raise rates? and if so how would that affect the economy?

    • Cody Shirk September 17, 2016 at 11:50 pm - Reply

      Eventually, yes.
      On one hand it can help stimulate the desire to lend money out.
      On the other hand it may annihilate some businesses that depend on cheap money.

      Also, it depends what happens with inflation.

  7. Ronald October 5, 2016 at 12:15 am - Reply

    I live in Ecuador and we use US Dollar as currency. What could happen to our country if US Bonds start defaulting?

    • Ronald October 5, 2016 at 12:27 am - Reply

      Also, How can I profit from it?

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