Marko Ilic

If you're an investor, you need to understand this one simple thing: The world took out $300+ trillion in global debt when interest rates were 0-1% And now it's being forced to refinance at 5%+ interest rates. UBS just gated a €400mn real estate fund. One more fund added to the growing pile of private equity and private credit funds that are telling investors to take a hike. We've been talking about "something breaking" since 2022. There have been mini crises along the way... UK gilt markets, regional banking crises, etc. But each of those was quickly papered over. Now investors are lulled into a sense of complacency, assuming the authorities can prevent pain indefinitely. But you simply cannot just go from 0% interest rates to 5%+ with record debt levels and not face big problems eventually. Think about it in simple terms: When rates are 1%, you can take out a $100M loan and only pay $1M a year in interest. You can invest that $100M into real estate, cash-flowing businesses, and speculative startups. That pushes valuations of everything higher and everyone thinks they're getting rich. Which is exactly what's been happening since 2008. Equity index performance since the money printing began in 2008 has been a complete statistical anomaly. The market sits in the 99th percentile for valuation richness based on 70 years of data. American exceptionalism? Technology boom? Or just the late stages of a massive debt orgy pushing valuations of everything higher? Eventually you need to refinance that $100M loan you took out. But what happens when interest rates are 5% now and refusing to come down? Now it costs $5M a year for the same $100M loan. Your expenses have gone 5x in a short period of time - but has your income done the same? Unlikely. Let's keep it simple and assume your income doubled and you can afford $2M a year in interest. But at 5% rates that means you can only take out a $40M loan. So now you're on the hook for the $60 million you borrowed. Maybe you can sell some of the assets you bought with the original $100M? But who's buying? Everyone is in the same boat! The price you bought at only made sense in a 0% interest rate world. The bottom line is people can't afford nearly as much debt when interest rates go up, so the debt-fueled increase in asset prices MUST come to an end. These are the simple mechanics of fiat money and debt. This is why it's a risk to take out debt when you hit 0% interest after 40 straight years of falling rates. Eventually the trend reverses one way or another. And you are at the mercy of whatever policy response the central planners decide to enact. They can choose: Great Depression II (debt collapse) or Currency crisis (print the fiat into oblivion to prevent the debt collapse) If you have a massive supply disruption of critical raw materials, perhaps you get both. Usually, the drastic policy response doesn't come before a true crisis. Which means we should expect asset prices to eventually adjust violently to the new reality as everyone starts to realize what's going on. In that environment, cash is the best asset to hold. "But cash is trash!" everyone screams near the generational top... Ask the silent generation who lived through the 1930s what they thought about cash. Cash is only trash when it can be printed at will, but occasionally there are constraints on printing cash. And in a debt spiral, it's actually the scarcest thing. Cash is like oxygen. Usually you have plenty. But sometimes, like when you're underwater and your lungs are screaming for air, you'd trade absolutely anything to get some. Occasionally it's very rational to be bullish on cash. If an asset you like is going down 50%, then your cash is going up 100% priced in that asset. Your purchasing power doubles. But only if you see cash as an asset at the right moment. Allowing yourself to be occasionally bullish on cash is what separates doomers from winners. If you know there's going to be a shortage of oil, it's easy to be bullish on oil. And if you think there's going to be a shortage of cash, then you can be bullish on cash. Simple. Interest rates rising in an environment with record debt levels usually means there's going to be a shortage of cash at some point. And people will have to sell whatever they can to get cash to service their debts. It's simple arithmetic. Yes, usually the central planners step in when things get too painful. Because printing money is better than doing nothing in their minds. But will they print if there's an oil supply shock sending the cost of everything skyward? Will they break their inflation mandate just to save the fiat ponzi? That would be a tacit admission that the whole system is a big fugazi that only survives with money printing. Which puts the credibility of sovereign debt and fiat currencies at risk, and thus jeopardizes the very power of the central planners themselves. As an investor you need to be aware of what's going on and what could happen between now and a potential policy response. The "gates" at UBS, Ares, and Apollo are simply the first signs that the fire has started but the exit door is WAY too small for the crowd. And you never want to be the last one out the door.