This year marks the tenth anniversary since the financial meltdown of 2008 claimed, among other casualties, Lehman Brothers Bank. Although banks are in better shape than they were in the run up that disaster, there are other worrisome storm clouds on the horizon.
Writing for Bloomberg, Sony Kapoor frets about four developments which in some ways make the world more vulnerable than pre-2008. First, global debt, both public (governments) and private has reached an all-time high. Global government debt stands today at $63 trillion, total public and private indebtedness at $237 trillion. That last figure is $70 trillion above pre-Lehman collapse figures. But not only is there substantially more debt, the quality of debt has deteriorated. Only eleven national governments and two U.S. corporations (Johnson & Johnson and Microsoft) still hold AAA debt ratings.
The U.S. federal deficit for 2007 was $161 billion, but is dwarfed ten years later by this year’s $804 billion. Total U.S. federal indebtedness today is 105 percent of GDP, compared to 65 percent in 2008.
Kapoor next cites the $15 trillion in assets on the books of the world’s central banks. Though interest rates have been rising, they are still close to record lows. With that much liquidity and such low rates, should another global recession strike, the central banks cannot come to the rescue. As banks try to normalize (raise)rates and sell back to the public some of the debt assets they own, the system risks destabilization.
Third, Kapoor worries about the rise of populist political candidates, both from the left and the right, as a destabilizing force in world political order. Populations on both sides of the Atlantic have seen dismal economic growth for a decade. Indeed Europe has had a worse time than the U.S. The people are restless for real change to better their lives and are breaking from the effete policy wonk clones that got them into this mess in the first place.
Finally, related to the last point, those populist political figures, and in particular President Trump are “taking a wrecking ball” (the author’s term) to international organizations such as the G-7 and G-20. Should another global crisis strike, the allies are scattered and not able to respond in unity.
We share the concerns presented in Kapoor’s first two points, but take issue with the other two. Sovereign debt is where it is because governments worldwide, but especially in Europe and the U.S. have spent money out of control, accumulating gargantuan debts. Yet real wages have actually declined over ten years and the middle class is shrinking. Is there any wonder why the voting public has turned in desperation to radical candidates that promise to tear down the Tower of Babel and return greatness to their nations?
Are these political strongmen “destabilizing”? Undoubtedly, but what exactly are they destabilizing if not the juggernaut spending machines that decades of status quo governance has used to saddle their citizens with mountainous debt? The people want to break the chains from their wrists and ankles and sought leaders that promised to free them.
At Cornerstone Financial we have been saying for months that the equity markets could be entering a topping process eventually leading to a bear market and recession. The indebtedness and the quantitative tightening cited in the article are looming crises. We expect the bear market in stocks sometime late this year or early 2019 with the recession within nine months thereafter.
People in or near retirement cannot abide another stiff stock market loss in their retirement investments. Some holding bond-related investments may already be seeing declines due to rising interest rates.
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