Don’t forget the elephant in the room


I just read a gloomy piece from ZeroHedge on the end to the debt super cycle. While I am a big buyer in what is happening in the US in terms of keeping things afloat (as buoyant markets keep expressing) post the election I can’t move away from my core thinking that we are still positioned in such a precarious fiscal state. Global debt levels are ar unsustainably high rates. Global growth is anemic as it requires more and more dollars printed to turn one dollar of GDP. I remind people that velocity of money metrics are terrible. Velocity being the best indicator of confidence which drives economic growth. A reminder:

1) A recent US Federal Reserve survey found that 47% of Americans couldn’t raise $400 in emergency cash were the need to arise. 5% unemployment rate belies financial difficulties.

2) A banksurvey in Australia showed 50% of people wouldn’t be able to meet their financial obligations if unemployed for more than 3 months. Housing price to income ratio almost twice the level pre-GFC. Private debt: GDP ratio at 160%. Credit rating downgrade imminent.

3) c.60% of ETF purchases in Japan and c. 100% of sovereign bond purchases are bought by the Bank of Japan which now owns 40%+ of outstanding government debt. 15 year Japanese government bonds now yield -0.004%. Japan’s move to negative rates has caused a run on sales of mini-vaults as people look to store their own cash.

4) M2/M3 money velocity has hit all time lows in the US, ECB, Australia, China & Japan.

5) Italian banks non performing loans (NPLs) are approaching 20% and as high as 50% in the south of the country. The ECB is breaching their own covenants to hide the mess. Belgian Optima Bank has just been shut down for not being able to meet obligations.

6) Over 25% of those in the EU live below the poverty line and youth unemployment is c.25% with long term unemployment now 50%. In Greece those numbers are 36%, 58% and 72%.

7) China’s industrial sector among others shows clear signs of recording sales without much hope of being paid with receivables ballooning in some cases leaping to over 5 years of reported revenue pointing to a sharp uptick in corporate debt insolvency & NPLs to follow.

The reality is that an unwind of this magnitude will make 1929 look like a walk in the park.

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