Investors keep staying on the sidelines due to one very popular - or rather, unpopular - narrative: The global debt bomb is finally exploding.
For years now, fearmongering headlines on the subject have continued to stoke investor anxiety.
When debt levels skyrocketed in 2019, so did headlines like "Titanic Iceberg of World Debt Could Sink a Slowing Global Economy."
As the last decade of the 2010s wound down, year-end predictions and warnings multiplied, with December 2019 registering several doom-and-gloom debt bomb headlines.
On Dec. 1, Bloomberg postulated, "The Way Out for a World Economy Hooked on Debt? More Debt."
On Dec. 20, ABC News' top story was, "The World Bank Warns a 'Wave of Debt' Could Swamp Global Economy."
And in Britain, The Guardian on Jan. 4, fretted, "Debt Will Kill the Global Economy. But It Seems No One Cares."
The fuse has been lit on the global debt bomb - but it’s not time to pull out of the markets. Here’s the real story you need to know.
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
The Real Story on Global Debt
ABC News' article started out, "The World Bank has warned the largest and fastest rise in global debt in half a century could lead to another financial crisis as the world economy slows."
The article cited the World Bank's "Global Waves of Debt" report, which looked at four major episodes of debt increases in 100 countries since 1970. The first was the Latin American debt crisis of the 1980s, then the Asian financial crisis of the late 1990s, and then the global financial crisis from 2007 to 2009.
The report revealed that during the "fourth wave" from 2010 to 2019, the debt to GDP ratio of developing countries rose by more than half to 168%. (I'll break down those exact numbers country by country shortly.)
The report also showed that the rise of debt across both private companies and governments around the world could be "amplifying the risks if there is another global financial crisis."
Global debt surged by $7.5 trillion in just the first half of 2019, reaching a record $251 trillion, according to the Institute of International Finance (IIF).
The IIF estimates total global debt will have exceeded $255 trillion at the end of 2019.
It calls the increase, largely driven by the United States and China, "mind-boggling."
Moody's, one of the big credit rating agencies, is notably worried about prospects for the world's debt in 2020.
After reviewing Moody's latest ratings forecasts, an analyst said, "If we were to try to capture the agency's view of where we are heading on a palette of colors, we would be pointing at black - pitch black."
Citing politics in sovereign states and at the international level, Moody's believes "slow-motion stagnation" of global GDP growth will be increasingly compounded by unresolved structural issues, including aging populations, income inequality, low currency reserves, and poor government debt management.
And these countries are at the most risk...
Sovereign Debt Leads the Pack
International Monetary Fund (IMF) data points to 32 "high risk" countries with unsustainable debt, where government borrowing more than tripled in the last two years.
To make matters worse, countries with large account deficits that are overly reliant on foreign capital (including Argentina, Lebanon, Mongolia, Pakistan, Sri Lanka, Tunisia, Turkey, and Indonesia) could quickly see capital flight at the first whiff of a panic.
This alone would have a fourfold effect: It could send their currencies plummeting, making their foreign currency--denominated debts more unsustainable, triggering a default or at least a partial default à la Russia in 1998, and fanning contagion prospects.
But sovereign debt is only part of the problem.
Last October, the International Monetary Fund said almost 40% of the corporate debt in eight leading countries - the United States, China, Japan, Germany, Britain, France, Italy, and Spain - would "become so expensive during a recession that it would be impossible to service."
Firms unable to cover debt servicing costs from operating profits over an extended period, currently experiencing lackluster or nonexistent growth prospects, have risen to around 6% of non-financial listed companies in advanced economies.
According to the Bank for International Settlements, that's a multi-decade high.
Adding to worries, the IMF says that the risks are "elevated" in eight countries with systemically important financial sectors.
And then we literally hit closer to home, with household debt mounting…
In mid-2019, household debt to GDP hit 94% of GDP in South Korea, 84% in the UK, and 74% in the United States.
Debt ratios also stand at a high 74% in Hong Kong, 69% in Thailand, and 68% in Malaysia. China's household debt ratio is a more prudent 54%.
Rising household debt burdens, especially in the U.S. and parts of Asia, imply consumption booms are largely debt-driven.
If stressed households get squeezed by rising rates or an economic downturn, the engines of consumer confidence (consumer spending and production) could sputter. That would trigger a negative feedback loop that leads to rising delinquency rates, personal bankruptcies, bad debt write-downs, and all manner of knockoff effects.
But the thing is, not much (or any) of the above has happened - yet.
Just a Narrative
The global debt bomb narrative basically a story without an ending. It's a "not yet" narrative the head honchos on Wall Street intend to ride.
Despite the rolling negative narratives, including "global debt bomb" headlines, a drastic fourth quarter for stocks in 2018, and testy market bumps in May, August, and October of 2019, the consensus outlook for global economies and markets in 2020 is surprisingly upbeat.
And while geopolitical tremors just registered on investors' Richter scale and are a longstanding narrative that looks to be coming to life, saber-rattling over Mideast issues hasn't sunk any economy in years - and hasn't done much to markets except bruise them temporarily.
Analysts' and investors' fears of an escalating U.S.-China trade war are mostly in the rearview mirror with "phase one" being readied for signing, just as global growth looks to be bottoming out and bouncing.
The International Monetary Fund is forecasting 2020 global growth of 3.4%. The World Bank is forecasting 2.7% growth.
The principal driver of analysts' optimism is the accommodative approach taken by central banks around the world, generally to offset trade war concerns and falling investment in 2019.
But there's a lot more going on than central banks' 2019 easing moves…
The New Normal Is Nothing to Scoff At
The "lower for longer" mantra seems to be an almost articulated policy proscription, even though some central banks aren't openly waving green flags after rate decision meetings.
In the "new normal" economic world, where central banks unapologetically monetize government debt, lavish their constituent banks with risk-free interest bearing excess reserve accounts, and write put options for equity markets, trade wars don't really matter, financial engineering is cheap, and earnings and lackluster investments have a long runway to take off.
So, stock prices can keep climbing, and record global debt is nothing to lose sleep over.
Some analysts even contend that debt is gaining intellectual respectability, as are some leading economists, including Olivier Blanchard, a former chief economist at the IMF and now a senior fellow at the Peterson Institute for International Economics in Washington.
In keeping with modern monetary theory, they argue that any government able to issue their own currencies can and should borrow freely to finance fiscal stimulus as long as their central banks keep interest low.
With negative narratives at bay, interest rates lower for longer, and with fiscal stimulus being readied and global debt essentially being floated, equities are likely to keep going up, up, and up.
That's because it's all good - until it isn't - which is why I want to make sure you’re prepared and know exactly what’s going on in order to protect yourself and your money no matter what happens.
America’s Favorite Angel Investor Shows How Easy It Is for Anyone to Invest in Ground-Floor Startups
You’ve probably seen stories about this person or that person making an absolute fortune from some unknown startup suddenly becoming a household name… like Uber, Airbnb, SpaceX, or Bird.
Now, it’s your turn.
Shark Tank’s Robert Herjavec is showing how easy it is for anyone to turn as little as $50 into what can be life-changing windfalls… all from investing in startups.
The post Capital Wave Forecast: Global Debt Is Going to Crash Equity Markets: Just Not Today appeared first on Wall Street Insights & Indictments.
Follow Money Morning on Facebook and Twitter.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.