Author: Michael Douville
Leverage is such a great tool! Borrow other people’s money and expand! With a little luck and a good business climate, expensive acquisitions can payoff hugely! Miscalculate and a highly leveraged business does not have the reserves to weather the resulting cash drain! Three Chinese Conglomerates: HNA, LeEco, and Sunac purchased Billions of dollars in assets across the globe including New York City Commercial properties, Silicon Valley acreage, Electric Car Production Facilities in Nevada, Dick Clark Entertainment, Legendary Movie Studios, the AMC Entertainment Company, etc: an enormous buying spree! All highly leveraged with very little margin for error! Some media outlets are reporting HNA has more debt service than revenue! South African Conglomerate Steinhoff has been accused of accounting irregularities and the CEO has stepped down; Billions of Leverage is at risk. A robust economy could save them all; Economic Cycle Research Institute (ECRI) is reporting an Economic Slowdown is at hand.
Not only is the global economy turning down, but interest rates are beginning to rise exacerbating debt repayment. A downward spiral often starts as lenders require even more of a risk premium to lend to troubled entities reducing credit ratings which then require more premium: often a red flag of DOOM! Bondholders are in huge jeopardy of loss; the Equity Investors have already started suffering as stock prices decline. As credit ratings are reduced, vendors become very reluctant to extend products or services to the at risk businesses. Here in the US, many retailers are struggling with the same issues: Sears and Toys Are US are at risk this Holiday Shopping season. Should sales be less than expected, turmoil will result with over 60,000 employees at Toys Are Us alone. These red flags are not widely reported in the media indicating a disconnect between an exuberant and enthusiastic Stock Market and what may be the “Real Economy”. It is time to pay attention!
It is time to be Cautious! It is time to be Careful! It is time to be Conservative! You do not need to be 100% invested at all times and are you really “in for the long haul” or are you interested in protecting your Wealth for the Future? Have you discussed an “Exit Strategy” with your Financial Advisor? Do you have ready Reserves to pay expenses should revenues decline precipitously? Have you considered other asset classes? Do you have an “Income Lifeboat” to help mitigate economic turmoil so as to protect Cash positions? Economic turmoil will cause tremendous upheaval and hardship for those unprepared or unaware. Those that have prepared and have reserves, will reap Fortunes!
Check out Michael’s new book by clicking HERE.