The Credit Cycle

Superior investing doesn’t come from buying high quality assets, but from buying when the deal is good, the price is low, the potential return is substantial, and the risk is limited. These conditions are much more the case when the credit markets are in the less euphoric, more stringent part of their cycle.

The credit cycle is sometimes referred to as the capital market cycle, but the author does not find the distinction important.

Capital =all the money used to finance a business.

Credit = the portion of a company’s capital that is made up of debt rather than equity.

Psychology has a profound impact on the availability of credit.

The credit cycle is like a window, sometimes it is open, sometimes it is closed.

Prosperity brings expanded lending, which leads to unwise lending, which produces large losses, which makes lenders stop lending, which ends prosperity, and on and on.

Everything else being equal, the bigger the boom – the greater the excesses of the capital markets in the upward direction – the greater the bust. Timing and extent are never predictable, but the occurrence of cycles is the closest thing I know to inevitable.