The tide of global debt has peaked: 8 charts suggest what may happen next, as the tide retreats

The results of the central bankers’ great experiment with money printing are now in, and they are fairly depressing, as the charts above confirm:

  • On the left are the IMF’s annual forecasts from 2010 – 2018 (dotted lines) and the actual result (black)
  • Until recently, the Fund was convinced the world would soon see 5% GDP growth, or at least 4% growth
  • The actual outcome has been a steady decline until 2017 and this month’s forecast sees slowing growth by 2020

As the IMF headlined last week,current favorable growth rates will not last”.

  • On the right, is the amount of money the bankers have spent on money printing to achieve this result
  • China, the US, Japan, the Eurozone and the Bank of England printed over $30tn between 2009-2017
  • So far, only China – which did 2/3rds of the printing, has admitted its mistake, and changed the policy

The chart above shows what happens if you spend a lot of money without getting much return in terms of growth.  Again from the IMF, it shows that total global debt has risen to $164tn.  This is more than twice the size of global GDP – 225%, to be exact, based on latest 2016 data.  The IMF analysis also highlights the result of the money printing:

“Debt-to-GDP ratios in advanced economies are at levels not seen since World War II….In the last ten years, emerging market economies have been responsible for most of the increase. China alone contributed 43% to the increase in global debt since 2007. In contrast, the contribution from low income developing countries is barely noticeable.”

It doesn’t take a rocket scientist to work out the result of this failed policy, which is shown in the above IMF charts:

  • Global debt to GDP levels are higher than in 2008 and in the financial crisis; only World War 2 was higher
  • Debt ratios in the advanced economies are at their highest since the 1980s debt crisis
  • Emerging market ratios are lower (apart from China), but this is because of debt forgiveness at the Millennium

As everyone knows, borrowing is easy.  Almost all governments and commentators have lined up since 2009 to support the money-printing policy.  But the hard bit happens now as it starts to become obvious that the policy has failed.

We now have all the debt, but we don’t have the growth that would enable it to be paid off.

It would be easy to simply end here, and point out that John Richardson and I set out the reasons why money-printing could never work in 2011, when we published Boom, Gloom and the New Normal: How the Ageing of the BabyBoomers is Changing Demand Patterns, Again.  Our conclusion then was essentially based on common sense:

Central bankers simply confused cause and effect: demographics drive the economy, not monetary policy. 

Common sense tells us that young populations create a demographic dividend as their spending grows with their incomes.  But today’s ageing Western populations have a demographic deficit: older people already own most of what they need,and their incomes decline as they enter retirement.

But having been right in the past doesn’t help to solve today’s problem of excess debt and leverage:

  • Common sense also tells us that leverage equals risk – if it works out, everything is fine; if not…..
  • If you have a lot of debt and the world moves into recession, it becomes very hard to repay the debt

Financial markets are doing their best to warn us that the problems are growing.  Longer-term interest rates, which are not controlled by the central banks, have been rising for some time. They are telling us that some investors are no longer simply chasing yield.  They are instead worrying about risk – and whether their loan will actually be repaid.

Essentially, we are now in the and-game for stimulus policies.  Major debt restructuring is now inevitable – either on an organised basis, as set out by Bill White, the only central banker to warn of the 2008 Crisis – or more chaotically.

This restructuring is going to be painful, as the chart above on the impact of leverage confirms.  I originally highlighted it in August 2007, as the Crisis began to unfold – unfortunately, it now seems to have become relevant again..

Leverage makes people appear to be geniuses on the way up.  But on the way down, Warren Buffett’s famous warning is worth remembering: “Only when the tide goes out do you discover who’s been swimming naked”.


*Return on Equity is the fundamental measure of a company’s profitability, and is defined as the amount of profit or net income a company earns per investment dollar. 

The post The tide of global debt has peaked: 8 charts suggest what may happen next, as the tide retreats appeared first on Chemicals & The Economy.

Most hedge funds not an "alternative" asset class

GMO beta Nov11.pngWarren Buffett is the world’s most successful investor, earning $62bn from his investments by 2009. But if he had instead channelled this money through hedge funds, and still been equally successful, he would have ended up with just $5bn. They would have taken the other $57bn.

Hedge funds have thus been the most successful way in recent years of parting investors from their cash. The concept was that they would earn their vast fees (normally 2%/year and 20% of gains) by making money in up and down markets.

This, of course, was an easy game to play when the Western BabyBoomers (those born between 1946-70) were all in their peak consumption and savings years. Markets boomed then, as described in chapter 2 of the new ‘Boom, Gloom and the New Normal’ free eBook.

But as the chart above shows, life has been more difficult over the past decade. It comes from the GMO investment fund, and looks at the relative performance since 1996 of three types of portfolio:

• Those holding very volatile stocks, “high beta” (yellow line)
• Those holder ‘safer’, less volatile stocks, “low beta” (blue)
• Those holding the entire universe of stocks (red)

Unsurprisingly, the high beta stocks held by many hedge funds did very well until 2000, when the Boomers began to leave the peak consumption 25-54 age group. Since then, they have underperformed quite badly. Overall, they have earned just 3.8% annually since 1996 – much less than the steady 6.8% of the low beta stocks.

Or, as GMO put it, “remarkably, an asset class that purports to be an ‘alternative’ source of returns, with low correlation to equity markets, turns out to be simply another way to take downside equity market risk….once fees are taken into account, hedge funds appear to offer nothing beyond a way to sell insurance against sharp market declines“.

Blog readers whose pension funds invest in hedge funds may have cause to remember this conclusion when they examine their next statement.

Buffett says US rich should pay higher taxes

Buffett.jpgLast year, Warren Buffett paid only $7m taxes, just 17.4% of his income.

Now he says rich Americans, including himself, should pay more, in order to help reduce US debt. He notes that:

• In 1992, the wealthiest 400 Americans paid 29.2% tax on $16.9bn income
• In 2008, they paid just 21.5%, on incomes of $90.9bn

And he adds:

“People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”

Buffett says the US should “raise tax rates immediately on taxable income in excess of $1 million, including of course dividends and capital gains“.

This would have impacted just 236,883 households in 2009. He would also like an extra tax on the 8274 households who earn $10m or more.

It will be interesting to see if Congress follows his advice.