Government Debt Isn't the Problem—Private Debt Is
The Roaring Twenties, the Japanese boom of the '80s, and the U.S.'s in the early 2000s have one thing in common: They were debt-fueled binges that brought these economies to the brink of ruin.
Former Fed Chairman Alan Greenspan, discussing the financial crisis of 2008,wrote that “financial bubbles occur from time to time, and usually with little or no forewarning.”
That’s misleading at best. The 2008 collapse was predictable. And, more generally, major financial crises of this type can be seen well in advance—and prevented—if you know what to look for. In fact, there’s a fairly simple formula that predicts such crises with a high amount of confidence. And it suggests that the world economy remains in more peril than is generally appreciated.
Look familiar? Time and again, that’s the story we found: A major financial crisis is preceded by a runup in private debt relative to GDP. In fact, there seems to be only one other ingredient required for a crisis: that the absolute level of private debt is high to begin with. We found that almost all instances of rapid debt growth coupled with high overall levels of private debt have led to crises.
Until the moment of reckoning, things may seem wonderful. Rapid private-debt growth fueled what were viewed as triumphs in their day—the Roaring Twenties, the Japanese “economic miracle” of the ’80s, and the Asian boom of the ’90s—but these were debt-powered binges that brought these economies to the brink of economic ruin.
What’s alarming is that, of the two ingredients for an economic crisis—high private debt and rapid private-debt growth—one is still with us even after the 2008 collapse. Private debt in the U.S., relative to GDP, stands at 156 percent. That’s lower than the 173 percent it reached in 2008, but it’s still nearly triple the level—55 percent—it was at in 1950. Indeed, across the globe there has been a steep climb in the ratio of private debt to GDP over that period.
Exploding Private-Plus-Government Debt To GDP: Davos (World Economic Forum) Conversation Starter
The note suggests overall nonfinancial debt, and not just government debt, should be a topic of conversation for the Davos World Economic Forum this week. That includes private debt held by households and corporations, among others.
“The idea of using debt to boost economic growth is predicated on the idea that at least the debt/GDP ratio should fall back in times of economic growth,” wrote SG analyst Kit Juckes. “It didn’t happen in the great moderation of the 1990s, and it isn’t showing any signs of happening now, either.”
$223.3 trillion: The total indebtedness of the world, including all parts of the public and private sectors, amounting to 313% of global gross domestic product.
Advanced economies tend to draw attention for their debt at the government and household levels. But emerging markets are gathering debt at an increasing pace to drive their economic development.
Marc Faber: McDonald's shows bear market is coming
On Tuesday, McDonald's (MCD) reported that global same-store sales in August fell 3.7 percent in August, well short of expectations. The worst drop occurred in the Asia-Pacific region on the back of a Chinese meat safety scandal, but even U.S. sales slid 2.8 percent.
"We've had a bull run since October 2011 without more than an 11 percent correction," he notes. "And now we're probably not going to get a correction, but more likely, a bear market that will be 20 to 30 percent at some point."
Add that to Faber's observation that "the U.S. is the most pricey market compared to other markets in the world," and he has constructed a bearish case.
Market Cap to GDP: The Buffett Valuation Indicator
September 8, 2014
by Doug Short
In a CNBC interview earlier this spring CNBC interview (April 23rd), Warren Buffett expressed his view that stocks aren't "too frothy". However, both the "Buffett Index" and the Wilshire 5000 variant suggest that today's market is indeed at lofty valuations, now above the housing-bubble peak in 2007. In fact, the more timely of the two (Wilshire / GDP) has risen for eight consecutive quarters and is now approaching two standard deviations above its mean -- a level exceeded for six quarters during the dot.com bubble.DYI
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