Market to Crash Because of Debt Super Cycle?
Before I get into this very interesting newsletter, I wanted to remind everyone about the webinar we did with a rock star tactical money manager a few weeks ago.
Tactical Manager Returns +5.8% for 2015 and +4.21% YTD February 21, 2016
To view the webinar on recording, click on the following link:
I read the most fascinating 23-page report over the weekend. I was so moved by what I read that I wanted to put it out to my hot-list this week.
To download this amazing 23-page report that explains why a world debt crisis could be the catalyst for a major market crash, click on the following link:
The following is one of the opening paragraphs from the paper:
The largest debt super-cycle in modern history is ending and it threatens economic growth and financial markets. The 2008 Great Financial Crisis was an opportunity for the world to deleverage, but in the last 7 years global debt to GDP has climbed by over $57 trillion.
For the last many years, the world’s economy has been driven in large part by easy access to cheap money (QE) and artificially low interest rates. Companies who had access to cheap money borrowed and borrowed and borrowed. Borrowing large sums of money is fine if you can use the borrowed funds to grow and so long as you can service the debt.
Massive debt defaults are coming–there are three problems that will cause massive debt defaults in the coming months/years. These defaults could be the catalyst that spark a huge market crash (much worse than we’ve seen in the first part of 2016).
1) Sustainable Profits–in order for companies to service all the debt that many have taken on, they need sustainable profits. Unfortunately, the world is in a global slowdown which means profits are trending down (therefore, less revenue to pay interest on debt).
2) Rising Interest Rates–the U.S. Government has started to raise interest rates. As rates start to rise, cost to service debt rises. So, if we have lower corporate profits and rising interest rates, this will cause many companies to default on their loans (which is already starting to happen).
3) Currency wars will cause defaults-this is not understood and has been overlooked by most of the industry. Much of the debt in the world is based on US dollars. However, the revenue from emerging market companies is in their local currency. The US dollar is on the rise and foreign countries are devaluing their currency. That is a double whammy when trying to pay back a loan (especially when revenue is down).
Let’s look at an example. Assume you are a company that borrowed $50 million in US dollars at our recent low interest rates. Assume the company generates enough cash flow to pay the interest on the loan. Now assume that country in which the company resides has its currency devalued 30% against the US dollar. It now becomes 30% more expensive to service the loan. Then assume the interest rate charged on the loan rises. Consequences? Massive defaults.
Corporate debt at historic levels–the following chart says it all, the corporate world is leveraged to the hilt and something has to give.
Debt to GDP
In short, when the GDP ratio is 90% or less, an environment for economic growth is present. When over 90%, the debt is detrimental to economic growth. Let’s look at the debt-to-GDP ratio for various countries, industries, and the world in general.
102% U.S. Government
93.5% Euro zone
286% The world debt-to-GDP ratio
The 286% number comes from a McKinsey report published in February 2015 and is the total debt/GDP ratio for the entire world. The full report can be found by clicking here.
Since anything over 90% is detrimental to growth, you can see why some people are concerned (although you wouldn’t know it by listening to pundits on financial TV or radio shows)
No bail outs
When the mortgage crash occurred back in 2007-2008, the US bank industry was left holding the bag and therefore the government came in to bail them out.
The following chart should give readers concern. What does it say? It says that banks are not holding much of a majority of the outstanding debt. Who then is holding the debt? Essentially private investors through the purchase of bonds.
US investors have increased holdings of global debt from 10% in 2009 to over 33% in 2014. So bond holders (investors) are the ones looking to take the brunt of the debt crisis (there is no safety net for these investors).
If you are listening to the pundits on TV and are positioning your clients accordingly, you and they are in for much disappointment in 2016. The debt crisis is real and the chances that it will act as a catalyst to a market crash is significant.
Advisors who are using tactically managed strategies to protect their clients and even earn money in a downward cycle will get through 2016 with a lot less heartache.
If you have not checked out the low beta/low drawdown risk/tactically managed strategies offered by POM Planning (www.pomplanning.net/ummp), don’t you think it’s about time?
POM Planning is Coming Back to Southern California
It’s official; one of the fastest growing RIAs in the industry (www.pomplanning.net) is bringing their industry leading training back to southern California on March 22 and 23, 2016.
To download the sign up form for this seminar, click on the following link:
Roccy DeFrancesco, JD
Founder, The Wealth Preservation Institute
144 Grand Blvd
Benton Harbor, MI 49022