Has the world’s economy really recovered from the 2007-2009 great financial crisis?
OK, a lot of monetary chicanery such as quantitative easing (in effect, printing more money) has been employed by central banks to massage global economic growth.
To be honest, though, the net result has been disappointing. Neither GDP nor inflation has picked up as much as the financial engineers wanted.
But one thing has exploded…
And the latest scary stats show just how big a problem this is becoming…
The sky’s the limit
As the Wall Street-driven bull roars on, bears are right out of favour.
The sky appears to be the limit for stock market optimists: they don’t want to be reminded about the harsh realities of why share prices have soared (like having those oodles of freshly-minted cash thrown at them for several years).
But it’s just as well that some people still have their feet on the ground.
Cue the Institute of International Finance (IIF) and its Global Debt Monitor.
Here’s what the latest edition, published a couple of days ago, had to say:
In this year’s first three months, global debt rose by more than $3 trillion. As a result the 2018 slowdown in debt accumulation is looking more like a blip than a reversal of the long-term trend in loan growth.
Against the backdrop of a substantial easing in financial conditions, in Q1 2019 borrowers took on loans at the fastest pace in more than a year. As a result, global debt of $246 trillion at end-March 2019 was just $2 trillion below the all-time high of $248 trillion reached in Q1 2018. In addition, at almost 320% of GDP, it has nearly reached the all-time record of almost 323% that was set in mid-2016.
I find it alarming that the borrowing baton has now been picked up by emerging economies whose debt hit a record high of $69 trillion (216% of GDP). It was shared between both governments and households, with overall debt-to-GDP ratios since Q1 2018 rising most in Chile, Korea, Brazil, South Africa, Pakistan and China.
The latter is the most-watched of these because of its huge importance to the global economy. The IIF says that with total debt here nearing 310% of GDP, “deleveraging challenges for China remain acute. While authorities’ efforts to curb shadow bank lending… have prompted a cutback in non-financial corporate debt, net borrowing in other sectors has brought China’s total debt to over $40 trillion—some 15% of all global debt.”
In what’s still the ‘Big Daddy’ of the debt markets – the US – federal government borrowing hit a new peak. At end-March 2019 it was above 101% of GDP. Total US borrowing has risen by $2.9 trillion since Q1 2018. The country’s debt mountain had reached an all-time high of more than $69 trillion by the end of 2019’s first quarter.
Over to the US corporate sector: with borrowing here also growing above trend, an increase in bank lending has helped push the debt of non-financial firms to a new high of nearly 75% of GDP.
Would falling rates help?
For the government, lower rates might not help much, notes the IIF, as annualised interest bills reached a record high of $830bn in Q1 2019: it estimates “that even a 100bp decline in borrowing costs would only reduce federal interest spending by $20-25bn per year over the medium term”. That’s hardly a dent in the country’s debt expenses.
Sure, falling interest rates could help those US firms that have high refinancing needs, yet “this may not do much to improve business sentiment (or investment spending), given trade tensions and concern about earnings growth”, says the IIF. “More broadly, our US Business Health Index remains weak, driven by growing reliance on short-term debt, deteriorating interest coverage/liquidity… and declining returns on assets”.
As a reminder, the US earnings season – in which American companies report on their first-half figures – is just getting underway. Don’t take headlines about firms ‘consistently beating estimates’ too seriously. Managements have talked down expectations so far that the actual numbers are likely to exceed analysts’ forecasts. But this doesn’t mean that those earnings are good in absolute terms.
In short, the last decade’s economic recovery is a myth. Without governments, companies, households and individuals incurring ever-more debt, it wouldn’t have happened. Which is another way of saying that it’s built on sand and won’t last.
Yet investors are still fooling themselves that there’s no bear market on the way. And they’re prepared to pay way over the odds for financial assets.
I’ve recently been harping about negative interest rates being ‘paid’ on many government bonds (yes despite all that debt I examined earlier).
“We now regularly witness some of the most extreme financial anomalies imaginable”, says Simon Black on SovereignMan. “A few days ago the insanity reached a whole new level.”
“Some junk bonds in Europe [now] have negative yields. Think about this: a junk bond is basically debt issued by a company with financials so risky that analysts expect there’s a good chance the company won’t pay its debts. Despite these substantial risks, investors are willing to loan money to these companies… at negative rates of return.”
The irony here is that negative bond returns suggest economic contraction, which is generally very bad news for companies that have issued junk bonds. Normally you’d expect yields on the latter to increase in order to reflect the threat of that global debt overhang to economic growth.
I’ll leave Simon with the last word:
“Seriously?? You take all that risk and then GUARANTEE you’ll lose money. One of the only things we know for sure about financial markets is that they are always cyclical. Up/Down, Boom/Bust. These cycles have been with us forever. It’s impossible to predict exactly when the decline will occur. But when you see junk bonds with negative yields, it’s likely that we’re… close to the end of the boom phase.”
You have been warned…