“Shark Tank” star Kevin O’Leary thinks high interest rates are about to spark a fresh bout of chaos in the US economy. The famed investor pointed to high interest rates as the result of the Federal Reserve’s battle to bring down inflation. The fed fund rates at a range of 5.25%-5.50% is the highest the rate has been since 2001, which some observers fear could overtighten financial conditions and push the economy into a recession, economists have warned.
High rates could particularly spell trouble for the commercial real estate sector, where there’s around $1.5 trillion of debt that’s set to mature within the next two to three years. That means loans that were previously financed at a 5%-6% interest rate will face a cost of borrowing around 9%-11%, O’Leary predicted, which is putting pressure on property firms. Troubled property assets have already hit $64 billion according to a Bloomberg analysis, while commercial mortgage delinquencies rose to 3% in the first quarter of 2023.
Banks are also under pressure as they brace for higher capital requirements
O’Leary said that banks are also feeling the heat as they prepare for higher capital requirements, which are meant to ensure that they have enough liquidity to withstand financial shocks. Many banks have started to pull back on writing new loans, with lending conditions tightening the most on record this past April, according to Morgan Stanley.
“That is going to cause a real run again on these banks. Because if you have a payroll account at a regional bank right now … you’re quietly moving it to Citi or JPMorgan or Morgan Stanley.” O’Leary said in an interview on Fox Business on Sunday.
The trouble will ultimately spill over to small businesses, which make up around 60% of jobs in the US economy, according to O’Leary. Practically “no one” is lending to businesses with under $500 million in sales, he added, which he believes is causing some companies to turn to the shadow banking market, where they can borrow money from non-bank lenders at higher interest rates and less regulation.
O’Leary advises investors to be cautious and diversified
O’Leary said that he is not optimistic about the outlook for the US economy in the coming months, as he expects more volatility and uncertainty in the markets. He advised investors to be cautious and diversified, and to avoid sectors that are sensitive to interest rates, such as utilities, consumer staples, and real estate investment trusts (REITs).
He also said that he is looking for opportunities in sectors that are benefiting from innovation and disruption, such as technology, biotechnology, and cryptocurrency. He said that he is bullish on Bitcoin, Ethereum, and other digital assets, as he believes they offer a hedge against inflation and currency devaluation.
“I’m not going to sit here and tell you everything is going to be fine. It’s not. There’s going to be real chaos,” O’Leary said. “But there’s also going to be opportunity.”