Talk about a hangover. The world’s got $247 trillion of debt hanging over its collective head.
If there’s a broken link anywhere along the chain of global connection, or if a big debt can’t be serviced, or rolled over, or there’s a default, there’s one thing I know for sure… Contagion will be swift, and stocks will throw up their gains quickly.
Don’t look now, but we’re getting to a breaking point thanks to escalating trade wars, emerging markets debts that have to be rolled over this year, and the fact that China’s stock market is already in the tank.
It’s like déjà vu all over again.
The “Extend and Pretend” Method
According to the Institute of International Finance’s July 2018 Global Debt Monitor report, household, business, and government debt rose $8 trillion in the first quarter of 2018.
The Debt Monitor calculates total debt at $247 trillion. That’s more than 318% of global GDP and a huge burden that’s been abetted and simultaneously masked by central banks.
For more than a decade now central banks across the globe, led by America’s private central bank, the Federal Reserve System, flooded markets and economies with cheap money.
Driving down interest rates, even into negative territory, so debt investors actually pay issuers for the privilege of lending them money, allowed weak borrowers, households, companies, and government treasuries to borrow new money and roll over maturing debt instruments with the greatest of ease.
There are only two options indebted borrowers have:
- Pay off their debts when they come due
- Roll them over by borrowing the maturing amount due.
The latter option is often called “extend and pretend,” and is the one used most of the time, especially by companies and governments
That’s pretend, as in “pretend you’re eventually capable of paying off what you owe.”
Paying off maturing debt requires the wherewithal to pay it off. The borrowing entity must have income sufficient to do what they need to do on a daily basis and put aside enough to pay off their loans.
Without rising incomes, paying off outstanding and mounting debts becomes an increasingly precarious proposition.
And while some companies are thriving and generating lots of income, personal income growth has been mostly stagnant, and government income from taxes has been falling.
The problem, and it’s a gigantic one, is that central banks are pulling back their so-called “accommodation,” letting rates rise and in some countries, like the U.S., actually raising rates.
Of course, rising rates means borrowers have to pay more to service their debt when they roll it over.
Then there’s the incipient return of inflation. Rising inflation puts more pressure on rising rates, creating a negative feedback loop.
History Repeats Itself
The last time we saw real panic in the market, before the correction we experienced this February on the prospect of rising rates and tough tariff talk, was in the summer of 2015.
By August of 2015, the Chinese stock market had been selling off hard based on prospects for slowing growth and overleveraged borrowers having trouble rolling over their debts.
That was followed by the threat of Greece defaulting on their national debt.
Panic quickly spread across the globe, in what’s now commonly known as contagion.
On Monday, Black Monday to the Chinese, the Shanghai Composite dropped an additional 8%.
The Dow Jones Industrials Average opened the day down 1000 points, before “recovering” to end the day down only 588 points.
Europe was hit everywhere, emerging markets took it on the chin, and stocks in India ended the day 5.94% down. And that’s when rates were low and negative across Europe and Japan and there were no signs of inflation anywhere.
All that’s changed.
There’s more debt weighing everyone down today, rates are rising not falling, and inflation is percolating. Any weak link anywhere could trigger another massive round of contagion selling.
Some analysts believe it will start in emerging markets that have more than $1 trillion in debt coming due this year that they’ll have to roll over.
Other analysts believe rising rates in the U.S. will trigger a bond market selloff here and in emerging markets, and that will create a contagion effect.
Still other analysts think Russia could be the trigger if the ruble collapses. Or China could be the trigger if growth slows, which it is doing already, and the Chinese market collapses again, which it’s well on the way to doing already.
There’s no telling what the trigger will be, just that with the mountain of debt overhanging world markets and global economies, something’s gotta give.
And when it does, watch out for raging contagion.
If you’re still at the mercy of market sentiment, there’s no guarantee that your portfolio can survive the coming panic.
But none of that matters. There is a way to make thousands of extra dollars per week, regardless of what debt hangovers and market panic threaten your assets.
In fact, I just showed my select group of members their high-profit potential trade recommendation yesterday morning, and we’ll know just how it pans out before the week is over.
Watch how I do it here, before these trades pass you by.
On Friday I’ll tell you what to watch for and how to make a fortune when the bell tolls.