Anything For You All: A $305 billion investment chief says markets are 'on a collision course for disaster'

A $305 billion investment chief says markets are 'on a collision course for disaster'

Scott Minerd, the chief investment officer of Guggenheim Partners with $305 billion in assets under management, sees markets on a "collision course for disaster."
That's because he sees President Donald Trump's fiscal stimulus as ill-timed for the economy and believes it will force the Federal Reserve to be more aggressive about raising interest rates.
Higher interest rates will cripple highly indebted corporations in the next recession, which Minerd predicts could come as soon as 2020.

President Donald Trump's fiscal stimulus may have set global financial markets on a "collision course for disaster," according to Scott Minerd, Guggenheim Partners' chief investment officer.

Minerd, who manages $305 billion in assets, writes in a research note to be released later Friday that the stimulus will force the Federal Reserve to be more aggressive in raising interest rates. He cites a combination of tax cuts and higher budget spending at a time when the economic recovery is already long in the tooth and unemployment is historically low.

That could spell trouble for a corporate sector that has loaded up on debt over the past few years.

Minerd sees strong economic growth this year and next followed by a potential downturn after 2019 — a painful one for which he believes neither the Federal Reserve nor the federal government will be well prepared.

"With the huge fiscal stimulus coming online, the Fed will feel obliged to play the role of creating economic headwinds," he wrote. "The collision will take place when the effects of fiscal stimulus begin to wear off and monetary policy keeps getting more and more restrictive."

Indeed, the Fed raised interest rates this week but also revised up its economic growth forecasts for this year and next, in large part because of the expected impact of fiscal policies. Fears of a more accelerated pace of interest-rate increases have been weighing on markets, with investors concerned the central bank could overshoot and cause a recession.

Minerd does not see a slump in the immediate future. But when it does come, it will be a deep, he says.

"We will enter the next recession with the highest debt load on record for corporate balance sheets,” writes Minerd, who has been recommending clients to dump their corporate-bond holdings.

"In the last recession, consumption by households collapsed because their balance sheets were overburdened by debt, and it was the household sector that led us into the recession," he said.

"The next recession is going to emanate from the corporate sector. There is likely to be a sharp decline in employment and a sharp decline in profitability, followed by widening credit spreads as the market discounts the expectation of higher corporate defaults."

Look out below.

Read »