Forecasting Eye

 

During every investment craze, there are plenty of signs that things are taking a wrong turn if one knows where to look. One good indicator is when non-finance professionals suddenly not only talk about their investments but start lecturing others about the incredible returns they claim to be making.

 

Being added to the private Bitcoin messaging group of my Uber driver about a year ago, just before Bitcoin crashed, was in hindsight such an event.

 

The scene in the film The Big Short where the exotic dancer starts boasting to the finance experts about her heavily leveraged property portfolio comes to mind….

 

For consumers, alternative investment prospects can be a difficult field to navigate especially in times of technological change and fin tech disruptors, which can sometimes make it tricky to discern the revolutionary from the crazy.

 

However, it doesn’t always have to be a complicated derivative product or a new technology as an investment idea that raises eyebrows. A UK restaurant chain is offering customers discounted meals with so-called mini-bonds, which means they are not listed and cannot be traded before the date of maturity. In case of a default – not unheard of in the highly competitive industry of high-street chain restaurants – these bondholders would be the last to be paid out.

 

There is at least one craft brewery making an essentially similar offer, though in this case the brewery already has a successful track record of funding offerings and a loyal investor base.

 

At the extreme end of the scam-spectrum is the Iraqi dinar investment scam. The dinar is currently trading at 1,190 to the dollar but, apparently on the basis of a vague comment from President Trump that eventually all currencies be on a level playing field, true Trump believers are buying them up in the confident expectation of making millions when the dinar finally achieves dollar parity.

How can retail investors distinguish genuine opportunities from investment bubbles or even outright fraud? First of all, it should be clear that in the world of investment, there are no returns to be made without risk. And tasty (literally!) perks should not distract from a fundamental analysis of the business behind the investment.

Scams and frauds tend to occur more frequently in the later stages of the stock market cycle after a long upswing when unemployment has fallen and people are looking for innovative ways of achieving high yields especially given that high valuations have compressed the yields on conventional investments.

 

We have repeatedly warned in our commentary not only that the main equity markets are overvalued (perhaps by as much as a third) but also that a global downturn in 2019-20 is highly likely with risks mounting in China, the Eurozone and the US. American household debt soared to $13.5 trillion in the third quarter of 2018, more than a fifth higher than at its 2008 peak and with delinquency rates reaching a seven-year high at 4.7%. Similarly concerning are the debt levels found among Chinese businesses and European treasuries.

A debt-laden global economy that feels just past the peak of a synchronized upswing is a fertile breeding ground for more scams and fraudsters – investors should take note.

 

Contact: Kay Daniel Neufeld kneufeld@cebr.com, 020 7324 2841