STABLE PAPER MONEY
A stable paper monetary environment is something most of us genuinely hope for.
Unfortunately, both recent and long term history demonstrates such stability is rare.
Generally, change comes about when, “something”, some, “out of the box” (for those not paying attention) “black swan event” swoops down and raids on the parade. Bugger, they say, how did that happen.
Well, as history tends to suggest, same way as it always does. Too many promises, too much debt and an eventual lack of market confidence in the system’s ability to meet obligations.
The subsequent dash for collateral leaves many clamouring to paper claims. Then, “Saving” the system by helping deeply levered institutions keep their heads above water became the main central bank policy over the last 10 years.
The chart below is a small but important (the chart that enabled more leverage, in every market) indication of what it has cost so far.
As we remind you later in this note, while central banks have been busily maintaining “peace”, global capital markets have been FEASTING on the low debt environment to leverage up and up and up.
In terms of who is now feeling the pain of leverage look no further than the countries in the chart below
Otherwise known as, “Emerging markets” Look what they’ve borrowed in US dollars.
So, how might the recent USD strength effect these “poor” buggars.
Looking a little ugly right now.
But seriously, with a trillion dollar a year budget deficit forever, a third of which funds interest at extra low rates and a deteriorating trade deficit despite “best efforts”, how long might this confidence in the USD last?
Who knows. Recent history suggests the Fed will break the world, yet again (as they inevitably do at the end of each cycle). Maybe through one rate rise too many. Maybe by allowing the dollar to strengthen too far. It could go either way.
The following is an extract from Grant Williams most recent “Things That Make you go Hmm” commentary. In our view, always a great read, especially this one, so Grant agreed for us to attach this weeks, if you can find the time to read.
Some exerts:
“From $84 trillion at the beginning of 2000, total global debt had reached $173 trillion by the time the Credit Crisis struck in 2008. Since then, during the age of deleveraging and austerity (remember that?), it has become a much more manageable $250 trillion…
More dangerous than any lack of understanding, however, has been the growing belief (particularly amongst corporates) that massive additional debt just might be a viable solution to massive over indebtedness.
While financial corporations have been positively restrained post-2008, borrowing ‘only’ an additional $3 trillion (don’t you love living in a world where you can use ‘only’ and ‘trillion’ in the same sentence and not feel ridiculous?), non- financial corporates have gone hog wild.
The appealing combination of having interest rates nailed to the floor and easy access to cheap funding has led the non financial corporate world to increase their borrowing from $46 trillion in 2008 to an eye- watering $74 trillion today (some 90% of global GDP) and much of it.
Even households have binged themselves silly, increasing total debt from $37 trillion in 2008 to $47 trillion today. A cursory glance under the hood of those numbers offers a particularly eye-watering statistic: while, in nominal terms, household debt is down in developed markets such as Germany, Japan and the U.K., in China, households have taken their borrowings from $757 billion in 2008 to… and I’m not kidding, just ask the Institute of International Finance (IIF) who provided all these figures… wait for it…$6.5 trillion.
What could possibly go wrong? While that was absolutely meant as a rhetorical question, I’ll tell you anyway. The dollar. That’s what.”
Back to us………
If you look at the 2 charts from Grant below and don’t understand why there might be some concern over the future stability of the US dollar please give us a call.
As such, you might also understand the sensibility of an allocation of physical gold to a portfolio.
Oh, and in Grants explanation, the shaded part of the graphs below is to demonstrate the relative “severity” in comparison to the “reset”, in 1971, when the good as gold USD became no longer good as gold as they left the gold standard behind.
This wasn’t from Grants, we thought we’d add it in anyway. Value for money, eh??
This too.
So, the anniversary of the decision to “save everything” from revaluation by central banks is this week. The old “tanks in the street unless Goldman gets paid”, Hank Paulson, Timmy G Geitner and Chairman B Bernanke, all reminiscing on as to what a great job they did in an editorial this week.
Remember, TARP, Troubled Asset Relief Program, removal of mark to market accounting and all the other genius ways of avoiding paying the piper? Still live and not well today.
Global debt has increased from $180 trillion to $250 trillion since the crisis. The problems of leverage and unpayable debt that were identified in 2008 are even worse today.
Eventually this will raise issues of default, inflation and/or renegotiation on unpayable debt.
We’ll leave the final word to the indomitable James Grant:
“Then too, there is credit quality, specifically the growing concentration of corporate membership at the lower end of the investment grade ratings scale. A July 25 research note from S&P Global Ratings found that U.S. nonfinancial corporate debt rated triple-B (the final full stop before junk) totalled $2.66 trillion, nearly triple the $1 trillion outstanding at the eve of the financial crisis in 2007. S&P also notes that “capital structures at many borrowers we rate. . . have become more aggressive, with leverage rising beyond historical levels.” The rating agency remains relatively sanguine, however, concluding that: “We believe that these borrowers can reduce leverage over a two year window and maintain investment-grade credit ratios.”
