The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

The Reality of Global Debt

Debt growth in the U.S. has been accelerating over the past decade. Federal debt is over $21 trillion. Will it ever be repaid? Of course it won’t, it’s impossible.

Corporate debt in the form of bonds is over $6 trillion.  If you include other borrowing, it’s over $20 TRILLION.  Excessive corporate debt is usually liquidated in bankruptcy courts when the lenders take a beating.

Total household debt has climbed to a new record high of over $13 trillion. Lenders and the US taxpayer are on the hook when the borrowers can’t repay and they survive on welfare. Student loans are in excess of $1.3 TRILLION, which will never be repaid. Auto loans are going into default, the highest delinquency rate since 1996.

Of course, the bulls on the economy ignore all this, as they did in 2007.

Bank of America economists and some other are concerned that the more than $230 trillion global debt will plunge the markets.

Our view: It’s not the ‘concern’ over the debt that is the problem, but the failure to service this debt in a recession as interest rates climb to compensate for the rising risk.  People don’t wake up one morning and, realizing that the total world debt is $230 TRILLION – which is 3 times global GDP, then decide they must sell all their stocks immediately.

It is actual debt defaults that trigger the dumping of stocks.

When a crash gets too serious and a recession is threatening systemic failures of banks, central banks finally start their efforts to try bailouts. This is done by creating new money and credit.

The days when the government debt was financed by private institutions are long gone. And this money creation eventually goes into the financial system. That’s what happened in 2009 in the major global economic zones.

The central banks have demonstrated that their power to create artificial credit to finance the governments is virtually unlimited as long as there is faith that the government will survive. However, those rescue efforts usually don’t start until the stock market has crashed, the economy is in deep recession, and bank failures threaten. In other words, things must get very bad before investors can expect a bailout.

Conclusion: It would be a big mistake to bet that central banks will prevent a recession and risk a bear market in stocks. Severe damage will be done to investors who are not prepared before the central banks can undertake to stop a debacle. On the other hand, our subscribers have had the opportunity to profit from bear markets by either shorting stocks or buying the inverses ETFs.

You can read more of our current analysis and forecasts on the global stock markets, bond markets, and global economies in our award-winning WELLINGTON LETTER, now in its 41st year.

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