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The chart below shows the ratio of private debt to GDP in the U.S., U.K. and Australia:

Click to enlarge:

Source: The Absolute Return Letter February 2012, The Unlikely Bull Market, Absolute Return Partners, LLP

British households are more leveraged than households in the U.S. Private debt peaked at over 450% of GDP in 2008 in U.K. compared to over 300% and 150% in the U.S. and Australia respectively. While households have started the deleveraging process after the credit crisis, they still have a long way to go before reaching manageable debt levels. As consumers reduce debt, consumption of goods and services is bound to suffer. Hence any recovery in the consumer-driven economies of the U.S. and the U.K. will be modest. Accordingly investors may want to be cautious of the recent rally in global equity markets.

Related ETFs:

  • iShares MSCI Australia Index (NYSEARCA:EWA)

  • SPDR S&P 500 ETF (NYSEARCA:SPY)

  • iShares MSCI United Kingdom Index (NYSEARCA:EWU)

Disclosure: No positions

Source: In The Nascent Deleveraging Process, Investors Should Be Wary Of Rally