Financial Collapse or Boom! – Global Growth Slowing and Debt Increasing

World debt has just reached a new record high.

In the first half of 2019, world debt added US$7.5 trillion and is sitting at US$250 trillion according to data from the Institute of International Finance (IIF).

That’s a whopping 320% of the world’s GDP!

With global growth slowing, debt is now increasing faster than global GDP.

And, as I mentioned earlier this week, with debt this high every dollar gets you less growth.

EXPOSED: The truth behind Australia’s ‘miracle’ economy

As Bloomberg reports, 60% of this debt increase comes from the world’s two largest economies: China and the US, and most of the increase is happening in the government and business sectors, as you can see below.

The Rum Rebellion 16-11-19

Source: Bloomberg

[Click to open in a new window]

Regular readers of this newsletter know that I think we are on a crash course.

The reasons why I think this is that we haven’t really solved many of the issues that caused the 2008 debt crisis. Our economic growth is running on debt fumes, and on huge amounts of stimuli.

Global growth is now slowing though and geopolitical risks are rising.

With the US and China binging on even more debt, whatever happens in these two economies will greatly affect what happens here in Australia.

The thing is, debt may be at an all-time high, but so are equity valuations. The Dow, the S&P 500 and the NASDAQ are all testing new heights.

I’ve written plenty about how dire things look in the long term, and how the fears of a financial collapse are growing.

But could we see things get better before they get worse?

Maybe.

The way things are, there are a couple of factors that could see the markets pushed higher.

One is that we are entering the last year of Donald Trump’s term. US presidential elections are drawing near, and candidates are already on the campaign trail.

Research from Schwab found that election year has usually been a good year for stock markets. The S&P 500 got on average a return of close to 7% and increased 81% of the times during election year.

It’s through this election year that presidential candidates usually try to boost things up like the economy and the job market to improve sentiment. After all, they do want to get re/elected.

A crash or a recession before elections would greatly diminish Trump’s chances for re-election, which is why we could see a boost in the markets in the near future.

What has happened so far?

Well, US President Donald Trump delivered his long-awaited tax cuts. This has boosted the stock market and the economy. And he is also succeeding at maintaining unemployment at record lows.

There is also more talk on the US and China finally reaching a trade deal, which is one of the biggest worries for investors, as I mentioned earlier this week.

The other thing that could boost stock markets is that we have seen more stimulus coming from central banks around the world as global growth slows.

The European Central Bank is looking at restarting their quantitative program.

The Reserve Bank of Australia has passed three rate cuts to the economy this year. This is already reigniting the property market.

The US Federal Reserve has also done a complete U-turn on their policy. Until recently, the Fed had been destroying liquidity by eliminating US$50 billion a month from their balance sheet, and rising interest rates to prepare for the next one.

Now they are doing the opposite.

They have pumped money into the repo market and are flooding the market with more liquidity. The Fed will be purchasing US$60 billion of treasury bills every month to control the interest rates.

They have also lowered interest rates on three occasions. This is quite a change from the beginning of the year, when expectations of a rate cut were close to zero.

We could see more stimulus, interest rate cuts and a deal between the US and China, even if it’s only a temporary one.

All of this could push stock markets higher…in the short term.

Obviously, there are two ways to benefit IF, and that is a big IF, markets go higher.

One is to invest in the hopes of a rally.

But this is highly speculative. You would be getting in when valuations are already at record highs, and the rally may never materialise. No one knows the future and timing the market is downright impossible, and very risky.

The other is to take advantage of the rally by getting out. In other words, sell the rally.

2020 could be a big year for the markets.

But at the same time, recession indicators are flashing red. There is geopolitical instability and things are getting riskier.

Best,


Selva Freigedo Signature
Selva Freigedo,
Editor, The Rum Rebellion

PS: WARNING – Here’s two reasons why the AUD could collapse in 2020. Download your free report now.


Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


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