Is Coronavirus Bursting The Fed’s Monster Bubble?

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Real reason for market chaos isn’t the virus

Rob Almeida of $800 billion US investment giant MFS says blaming coronavirus for the global market turmoil risks missing some more fundamental problems.

Think markets are tumbling because of coronavirus? Robert Almeida, global investment strategist at the $800 billion US funds management titan MFS, says you should think again.

He argues the virus outbreak is simply a catalyst for the exposure of the misallocation of capital that happens in every late-cycle market.

In the dot com bubble it was the misallocation of capital into tech, media and telco stocks.

Prior to the GFC, too much money went into the US housing market and fixed-interest products leveraged to that.

This time, Almeida argues, too much capital has been allocated to companies that have used debt and financial engineering (including the controversial practice of reverse factoring) to pump up their profits, and have then handed too much of those profits back to investors, instead of re-investing them.

He says the coronavirus is forcing investors to reassess the durability of the returns they’ve been getting – and investors don’t like what they see.

“Coronavirus might be the spark that lights the fire, but from my vantage point what you have is an overvalued financial market landscape, with deteriorating cash flow that you’re getting in return for this,” Almeida said at the Active Advantage event in Melbourne on Wednesday, after another ugly sell-off on Wall Street spilled into Australia’s markets.

“Valuations were excessive. Whether it was the coronavirus or something else, I think markets are mean-reverting to where they should.”

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