Bloomberg News finally did something useful this morning by publishing some startling graphs from McKinsey’s latest update on the worldwide debt tsunami. If you don’t mind a tad of rounding, the planetary debt total now stands at $200 trillion compared to world GDP of just $70 trillion.
The McKinsey graph on China tells it all. For the moment, forget about leverage ratios, debt carrying capacity and all the other fancy economic metrics. Does it seem likely that a country which is still run by a communist dictatorship and which was on the verge of mass starvation and utter impoverishment only 35 years ago could have prudently increased its outstanding total debt (public and private) from $2 trillion to $28 trillion or by 14X in the short span of 14 years? And especially when half of this period encompassed what is held to be the greatest global financial crisis of modern times
But now the edifice is beginning to roll over. Housing prices are falling and new footage put under construction has dropped by 30% over the last three months—something which has not even remotely happened during the last 15 years. At the same time, the consequent cooling of demand for construction materials and equipment is evident in China’s faltering industrial production numbers and the global commodity deflation that has resulted from its vast excess capacity in steel, shipbuilding, cement, aluminum, copper fabrication and all the rest.
Indeed, last year China spent upwards of $5 trillion on fixed asset investment—-a figure that is greater than the sum total for Europe and the US combined. Behind that towering number is an immense caravan of cement, structural steel, glass, copper and all the rest of the industrial commodities.
So when the China Ponzi finally crashes, the deflationary gales will propagate violently through the global economy and financial system. China’s $28 trillion tower of debt will come tumbling down in the process; and a world floating on $200 trillion of the stuff will not be far behind.
By Ambrose Evans-Pritchard
But that’s just the tip of the iceberg. The real truth coming out of this earnings season is that we have had a tremendous inflation of PE multiples during the last three years in anticipation, apparently, of the US economy hitting escape velocity and the overall global economy continuing to power onwards and upwards. As is evident from the financial news and “incoming” data, however, that presumption is not remotely correct.
So when Wall Street calls a great multiple expansion party that doesn’t pan out—–what happens next doesn’t require a labored explanation. The untoward course of market action in the year after 1999 and 2007, respectively, speaks for itself.
But the point here is that the eventual market
correction this time could be a doozy.
The magnitude of PE multiple expansion triggered when the Fed and other central banks went all in with ZIRP and QE has been enormous, and it has also gone largely unremarked upon.
By contrast, 73 straight months of ZIRP is not in the least bit normal or sustainable; nor is today’s 1.8% rate on the benchmark 10-year treasury note. Indeed, the fact that the last Fed policy rate increase—a mere 25 bps—-occurred 10 years ago is utterly abnormal, even freakish by the standards of prior history.
As far as the eye can see, corporate earnings will be facing rising interest rates.
The 33-year plunge of the treasury rate is over
except for the occasional spasm of fear-driven
flights to safety.
This means that the discount rate on future equity returns should be rising, as well.
DYI
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