The Global Debt Crisis Of 2015-20XX: 3 Simple Charts

by: Kirk Bostrom


Seven years after the Crisis of 2008-9, the 'Debt Never Went Away'.

The Spenders' and 'Lenders' of Last Resort are losing effectiveness.

Investors can benefit from international capital already 'on-the 'move'.

Back in the late 80s as a young neophyte on Wall Street attending a six month training program in New York City for newly hired institutional sales and trading employees at The First Boston Corporation, I learned a phrase for life that has never left me: 'K I S S' or Keep It Simple Stupid. The phrase is intuitive - the more simple something can be made, the better. Less is more. You get the picture.

I have tried my best, as hard as it is at times, to stick to that early mantra on what has proven to be wise advice I received many years ago. So with that said, in the simplest terms, it is clear we are living on 'borrowed time' since the Great Credit Crisis of 2008-9. I have written numerous articles detailing the massive increases in global debt issuance, particularly on the global government ledger, coupled with massive global central bank intervention.

At the end of the day, we are witnessing the end of an era of Keynesian credit expansionary policies 'now on steroids'. How did we get here? That is best articulated by summarizing the policymakers inherent tools:

"For Keynes, the government had to be prepared to act as the spender of last resort, just as the central bank acted as the lender of last resort."

To be sure, the government has clearly acted as the spender of last resort, with the US Government outstanding debt now racing towards $19 trillion. Government has borrowed and spent an astounding $9 trillion in just over 7 years. Unfunded liabilities are now estimated by experts at over $100 trillion. From healthcare to social security to student loans, etc. have all been swept under the mat once again in Washington and across the world's advanced economies. They too are precariously exploding higher at the same time worldwide.

It is obvious that governments around the world are running out of 'other people's money' to spend. (quoting Margaret Thatcher).

Meanwhile, the US central bank, the Federal Reserve, is acting as the lender of last resort, has increased its own balance sheet by nearly 500%, creating and lending an additional $3.7 trillion over approximately the same time period. With government running out of funds and higher taxes on the way, it is the world's central banks keeping Humpety Dumpety from falling down again.

Is it working? What does it all mean and why should every investor care? In keeping with the spirit of the K I S S mantra, below are 3 simple charts that tell a very important story that prudent investors should be paying attention now.

In Chart I above, despite the fact that for most investors the Credit Crisis of 2008-9 seems now a distant memory, one dangerous reality still looms: The Debt Never Went Away. The Private Sector Debt problem of the Credit and Mortgage Crisis of 2008 has transformed into an even greater Public Sector Debt problem.

In Chart II above, despite the fact that US credit expansionary policies have remained at full throttle for nearly 7 years running, US economic growth is slowing. The policymakers are now 'pushing on a string' with record monetary stimulus producing declining economic performance. With global growth slowing at the same time, Europe, Japan, and China are now in or near recessionary levels. Central banks around the world are cutting local interest rates even further and devaluing their respective currencies with hopes of 'exporting' their way out of economic malaise. In essence, everyone is attempting to export their way out into a shrinking global economic pie, and all at the same time. It's a race to the bottom.

Since 2008, there have been 558 interest rate cuts (22 already in 2015) with over $22.5 trillion in purchases of financial assets by the world's central banks. These same centrals banks now own more assets on their balance sheets than the combined GDP of both the United States and Japan. For the first time in world history, over 90% of the industrialized nations are holding interest rates at or near 0%. These global central banks are single-handedly directly and indirectly holding up the stock, bond, and risk markets despite the fact that global GDP has slowed from 4.4% to 2.5%.

The US remains the 'least dirty shirt' at the present time, and is clearly benefiting from the numerous global instabilities around the world. In Chart III above, US equity markets are racing ahead and may very well jettison significantly higher in the nearer term. A rising US Dollar and near 0% fixed income market make the US stock market the only game in town. Pensions, insurance companies, and savers are being penalized through negative real interest rates - forcing most into taking greater risk through greater exposure to the stock market, higher yielding longer term corporate bonds and mortgage backed securities.

History reminds us that rising stock, bond, and risk markets will not last forever. Government spending of last resort and central bank lending of last resort have clearly reached a point of greatly diminishing returns. International capital is on the move seeking additional yield and safe haven. Signs of major change in world financial markets are hiding in plain sight. Legendary investor John Templeton once said it best:

"It is impossible to produce superior performance unless you do something different from the majority."

The time to heed that advice is fast approaching.

Kirk D. Bostrom
Chief Portfolio Manager
Strategic Preservation Partners LP

Disclaimer: The views expressed are the views of Kirk Bostrom and are subject to change at any time based on market and other conditions. This material is for informational purposes only, and is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. The opinions expressed herein represent the current, good faith views of the author at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, the author does not guarantee the accuracy, adequacy or completeness of such information.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.