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Dear Readers,

There is no new way to go broke. It always comes down to this.

Too much debt.

I recently wrote to you about the potential for one specific asset class to be responsible for driving society’s full commitment to speculative investments.

That is, tokenize the ownership of private companies. Fractionalizing via tokens companies like SpaceX that allow retail investors to effectively grab a “share” of something that isn’t listed on a normal stock exchange.

Now, time will prove the ultimate judge. I can’t give 100% assurance here this is becoming mainstream.

Today, however, I want to talk to you about an event I am much more certain will occur.

And that is the most likely culprit once the credit faucets stop and then crack into pieces.

Students of the land markets know this day is fast approaching. And it’s almost certain that the very first cracks, way out on the margins, that are ultimately responsible for breaking the credit markets, will occur within the private credit and equity.

And this should really concern you.

Because the financial media is upping the stakes to draw those of you less informed into this space. And being paid handsomely to do so, I’m sure.
Source – Australian Financial Review

While the RBA paused its recent interest rate cuts – though still on track to cut in August, you need to avail yourself of the right advice here.  I obviously can’t offer tailored and personalized financial advice to you.

But what I can offer you is the history of the real estate cycle.  And what it can tell you about yet another gigantic set-up occuring right in front of your eyes.  At precisely the right time. Because we’ve been here before, with tragic consequences.

Get involved, or stay away? Let’s find out.

The obvious choice if you want income?

So lets take a step back to understand the motivation behind why you’re being pushed to chase yield.

From the recent AFR article which covered this entitled “10 yield plays that pay double the RBA cash rate”.

….readily available credit products with headline yields of as much as 10 per cent will look increasingly attractive to many investors.

After all, the options for yield-hungry investors are dwindling. Returns from term deposits are marching ever downwards, two-year Australian government bond rates have dropped 100 basis points to 3.18 per cent in a year, and the yield on the S&P/ASX 200 Index is trading near historic lows at 3.4 per cent.

That has put a new focus on the private credit products that are available to buy on the ASX. We are talking about listed investment companies (LICs) and exchange-traded funds from increasingly well-known groups including Metrics, KKR, Perpetual, LaTrobe and VanEck.

The benefits of this style of investing are clear. Unlike term deposits, they are very easy to buy and sell. They offer regular dividend income, a bonus for retirees. Then, of course, the ultimate reason these funds can offer north of 7 percent interest. Which is way above the current base cash rate in Australia and most other nations.

So, for most, it represents their first foray into the murky world of private credit and equity. Usually the preserve of family offices and the biggest superannuation trusts.

Or a sophisticated investor (someone with verifiable net worth exceeding $2 million, or a Sydney homeowner!)

So, that’s the why. But how does private equity and credit operate? This is a important consideration as it forms part of the due diligence any serious investor must undertake before deploying their precious capital.

Private credit describes lending to businesses by non-bank entities not available on public markets. These asset managers act like intermediares between investors and borrowers. Investors earn income in the form of interest payments.

Private credit financing ranges from bilateral deals, which involve a single lender, to syndicated financing involving multiple lenders. It is very different from the credit offered by traditional providers such as banks and governments via bonds.

But it’s the rarely mentioned part of all this that explains why this method has been among the leading growth areas in lending. Private credit operates in a much less regulated part of the lending market.

This growth has not gone completely unnoticed by regulators, with the Australian Securities and Investments Commission (ASIC) stating it has concern with its lack of transparency.

It’s a tale as old as time. One of manic cheerleaders who scream blue murder about how this is an absolute no-brainer, to the other side of the ledger of how these investments can go horribly wrong.

Or too good to be true?

This comes down to personal choice. Either you’re happy to accept higher risk for higher returns. Or, you are more inclined to be conservative with your money.

Private credit listed investment companies (LICs) are essentially closed pools of capital that invest in non-bank debt. They trade on the ASX like normal shares.

Much of what they own will be so-called structured credit – debt that is repackaged by bundling up normally uninvestable assets such as mortgages into securities (Mortgage Backed Securities or MBS) that can be given an investment grade. In this way, they are similar to banks in that a good part of the funding provided to Australia’s big banks also comes from home mortgages.

Oh boy, that old chestnut. I mean, MBS didn’t cause too much carnage when they spectacularly unwound this time last cycle in 2007/09, right?

In fact, knowing your history would inform you it was a seminal moment in the popularity of these private credit LIC’s. By placing such tight oversight upon more traditional banks’ use of these MBS and the like, it created a cause and effect.

Yes, these traditional banks are much more insulated these days from the constant rehypothecation of such derivatives. But it opened the door for private credit to take market share of this space instead.

In Australia, private credit LICs can invest in what are called hybrids—debt securities that can be converted into equity. In other countries, these assets are called contingent convertible bonds. Please note, however, this doesn’t forgo the additional risks for investors.

The holders of $17 billion worth of Credit Suisse hybrids received zero dollars when the bank was restructured before its takeover by UBS. That risk was enough for ASIC to stop banks from issuing new ones last year. The market for them was worth $43 billion but is now dwindling.

But that also speaks to another uncomfortable truth. Having ASIC step in provides unwanted regulatory scrutiny to these funds. No wonder the market for them has now dried up.

However, given they invest in a broad suite of assets (loans, trusts, notes, development loans, bank facilities, and equity), it does appear that for now the overall market is satisfied with the overall risk/reward on offer. For those interested, below are the top 10 yield-producing LIC’s from the AFR article.
Source – Australian Financial Review
So, are you tempted? Is this the one type of asset your portfolio lacks? Or are you already heavily invested in these and other ETFs for income? Private credit and equity means that, for the most part, what they invest your money in is private! You’ll never know who owns what to whom. Another issue is transparency.

A little history can go a long way. Those who study the history of the 18.6-year Real Estate Cycle have the benefits of it doing the heavy lifting they need to outperform the general markets. But it also teaches you the hidden order of the economy, so that you can time it.

It’s the timing that allows you to both profit and protect. And here is how to learn it, via a membership to the Boom Bust Bulletin (BBB). Let the BBB guide you on the inherent timing of the economy only knowledge of the land market can give you.

Each month this history and knowledge will be yours via monthly written editions and video postcards that will help explain the real estate cycle like never before.

We have been here before, I mentioned this at the start. Go back 30 years to 1990 and the collapse of Pyramid Group in Victoria.
Source – The Age
One of three building societies (what we’d call shadow banks now) that collapsed in the state at the time, resulting in a $900 million AUD taxpayer-funded bailout. Insane money at the time.

You may be happy to get a 7-10 per cent return on your invested money, but how happy are you for your taxpayer dollars to fund the relief when these things break? Believe it or not, Pyramid Group ran an actual pyramid scheme to attract clients’ money. Offering ever-higher interest rates to beat its competitors. Sound familiar today?

Of course, a bank run led to its collapse.

The allure of something for nothing, at the wrong time, is a true red flag. I’m sure you’d agree that knowing your investment window ahead of schedule would be of real comfort when peak turns to bust. And it’s this particular sector which, should history repeat, will arguably be the very first to fail.

Taking advantage of the remaining window present here and understanding the signs the timing inherent in the cycle can give you is the play here.

You just need to learn the timing now, right?

So, sign up now.
Best wishes,
Darren J Wilson
and your Property Sharemarket Economics Team

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This content is not personal or general advice. If you are in doubt as to how to apply or even should be applying the content in this document to your own personal situation, we recommend you seek professional financial advice. Feel free to forward this email to any other person whom you think should read it.