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Scott Minerd has a message for his fellows at Davos who are applauding rallying markets: Things aren't as good as they seem.
The Guggenheim Partners investment chief likened the inflation of asset prices caused by the loose money policies of central banks to a "ponzi scheme" that eventually must collapse.
"We will reach a tipping point when investors will awake to the rising tide of defaults and downgrades," he wrote in a letter from the World Economic Forum meeting. "The timing is hard to predict, but this reminds me a lot of the lead-up to the 2001 and 2002 recession."
Minerd's warning to clients came before U.S. President Donald Trump spoke to a delegation in Davos, where he faulted the U.S. Federal Reserve for trying to raise interest rates and said the central bank took too long to lower them. The European Central Bank will on Thursday decide about the direction of interest rates as officials weigh the extent of an economic slowdown.
Minerd cited rising defaults despite a rally in riskier assets, and reiterated a warning that BBB-rated bonds risk further downgrades. He said that type of debt is at a greater risk of deterioration than it was in 2007.
Anne Walsh, Guggenheim's fixed-income chief, said in an interview that 15% of the U.S. economy is already in recession. She said the Federal Reserve's efforts to pump liquidity into markets has created "zombie companies" that may see an outflow of capital as the utility of that money continues to diminish, she said.
The longer that this market runs, the harder the fall will be when it ends, she said.
"Patience will lead to bigger opportunities for disciplined investors who don't wander off into exotic asset classes or chase current returns," Minerd wrote in the letter.
(Updates with quotes in the final paragraph and context in paragraph four.)
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