As the 18.6-year real estate cycle nears its peak, markets become more creative.

Some call it “financial engineering.” Creating complex structures based on debt, equity, and derivatives, all intertwined in a way that even their creators don’t understand how dangerous they are…

Until they explode, like mortgage-backed securities did in 2007-2009.

I’m not saying that markets are about to crash… not in the near term, at least.

But I am seeing signs that the 18.6-year cycle is about to reach its peak over the next couple of years.

A Recent Financial Invention

You may have heard about private equity…

It’s an industry that, in broad terms, invests in companies, restructures them (while riddling them with enormous amounts of debt), improves their operations, and then tries to resell these companies to other investors.

Private equity funds are quite a formidable force. Some of them, such as Blackstone, have $1 trillion or more in assets under management.

And they have come up with a new scheme… guess what, it involves creating more debt. Typical late-cycle behavior.

Some of the companies they invested in are struggling because interest rates are higher.

So these funds borrow against their overall portfolios to finance these laggards.

In other words, they put the health of their “good” investments at risk while financing the struggling ones.

It’s called “defending the portfolio.” And everything would be okay if, as a group, private equity didn’t manage trillions of dollars of investors’ money.

But it does, which means that the amount of debt in the system could quickly balloon to hundreds of billions of dollars if not more.

Why is it important?

Leverage Has a Role in the Cycle

Remember 2007, when mortgage-backed securities got AAA credit ratings?

Well, history repeats itself…

These private equity funds are issuing debt against a portfolio of mostly good companies to support the bad ones.

This debt is risky, but it will be pitched as safe because it’s backed by a fund, not a single company.

We’ve been there. This “layering” is nothing new.

It’s always about covering bad investment decisions with other people’s debt.

It may be fine for some time, but eventually, the truth comes out.

For now, though, I see this trend accelerating.

Just this week, U.S. inflation numbers came in lower than expected. (I’ll discuss them in more detail soon.)

But the signal is clear: the economy seems to have stabilized, so central banks can take a break from tightening.

Stocks and bonds jumped. Markets are happy.

More growth, more debt, and the 18.6-year cycle continues. Just as I expected.

The party isn’t over yet… and you really want to take advantage of it while it lasts.



Phil Anderson

Editor, Cycles Trading with Phil Anderson

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