Short and concise analysis on concepts or recent events in the financial markets from the ASG Capital Team.
The topic of today is about fat cats and starving dogs. Fat cats is a term to describe the rich and powerful. Starving dogs are aspiring to be fat cats, but are far from getting there.
Historically, low US interest rates over the last decade have been a subsidy to weak, highly levered, even zombie corporations, or in other words, starving dogs.
The Federal Reserve’s monetary policy rolled out in 2022 has put an end of to all of this. It will reveal its full effects in the coming months. Funding, or more importantly, refinancing costs compared to previous years are set to spike upward significantly.
As the US economy slows, the revenue stream from economic activity is likely to be depressed. Higher rates and lower cash flow together combine into a lethal cocktail, notably for already starving dogs.
To avoid being overexposed to a rising risk of default, fixed income and credit investors are best advised to stick to issuers with strong balance sheets, deep cash reserves and sound business models: the fat cats of this world.
High US interest rates could bring back the natural Darwinian survival of the fittest, with fat cats at worst, slimming off a bit while starving dogs literally starve out of existence.
This podcast is for information only. It should not be considered as investment advice. We would recommend seeking professional investment advice when allocating to investments to any issuer.