As credit gets tighter, a lot of ‘dream’ ventures will prove to be unfeasible and fail
The United States economy is already in the process of entering recession, according to an economist specializing in how sentiment affects markets.
He predicted that a large amount of malinvested capital will be wiped out and areas of the economy that have historically been resistant to crises may not be so this time.
His research indicates that the economy is under the influence of “confidence cycles” and when consumer sentiment shifts toward the expectation of a recession, the market will actually enter one.
“I think the cake has been baked from the sentiment perspective where people are now acting on the assumption that a recession is coming. And remember, it’s that action that actually causes a recession to come,” said Peter Atwater, former hedge funder and now lecturer at the College of William & Mary in Virginia, during a recent Wealthion interview.
As Atwater sees it, thousands of companies have fudged their earnings with easy cash due to the ultra-low interest rates set by the Federal Reserve.
“With free money, the ability to financially engineer your earnings results is unlimited,” he said.
Now that rates are going up, such companies will start having trouble rolling over their loans.
“It’s sucking the air out of the room,” he said, anticipating that “thousands” of such companies may go under.
As credit gets tighter, a lot of “dream” ventures will prove to be unfeasible and fail, he predicted, noting that overconfidence in the market has caused investors “to buy promises of even the most ridiculous things.”
“There was so much capital irresponsibly deployed to capture dreams that the volume of equity destruction is going to be massive,” he said.
Now that rates are going up, such companies will start having trouble rolling over their loans.
“It’s sucking the air out of the room,” he said, anticipating that “thousands” of such companies may go under.
By Petr Svab
