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Causal Capital ~ The Knowledge Capital Specialists

The Global Debt Bubble

Thursday, February 25, 2016

In the theme of Party like it's 1999, we should be partying likes it's 2016. That's what comes to mind when I read through the "A lens for viewing the global economy" presentation that has just been published by the Bank for International Settlements.

 

We all know from looking at the markets, it's far from party time but global businesses are definitely taking on massive levels of debt unabated. To put it differently, if you aren't worried about the recent declines in commodity prices or the volatility across emerging market stock indices, this set of charts will be a sobering story for you.

 

Early Warning Indicators Dashboard for Debt | Martin Davies [Click image to enlarge]

 

The first chart set in this series is one of ours.  We took the debt, GDP and stress test figures from data published on the BIS website and pressed it through Microsoft BI. What we turned out was really quite a concerning image of leverage, especially leverage on property assets across the planet. Whichever way you paint this, there are several countries poised to be or already deeply entrapped in a property asset price bubble.

 

While some countries have a decade long affair hiking property prices through the channel of debt, the relationship between debt and interest rates seems to be an encouraging factor.  No surprises there!

 

Relationship between interest levels and debt | Bank for International Settlements 160210 Slides [LINK]

 

As you can see there is a high correlation between falling interest rates and increased debt levels. If anyone ever wanted proof that a longterm credit cycle debt addiction is in play, this chart kind of drives that sentiment home. What is most curious to ponder on is the steep incline of debt issuance right after the Global Financial Crisis of 2008.

 

Going on the change of slope for debt growth, the GFC did one thing; it put debt expansion on hold for about a year and then off we go again, the show must go on and let the debt game continue.

 

US dollar denominated loans | Bank for International Settlements 160210 Slides [LINK]

 

So where is all this debt being issued?

 

Core pools of debt origination can't be ascertained from this chart BUT the paper is US dollar denominated and much of it has been targeting emerging markets. About a third of all US dollar denominated debt isn't really in the US at all and the banks as well as the corporates are entangled in high leverage business models with the corporates taking a lion share of all issuance.

 

Which of these emerging markets are leveraging?

 

Emerging Market Debt | Bank for International Settlements 160210 Slides [LINK]

 

No surprises here either; Brazil and China are finding steep year on year growth of non-financial private sector debt. It isn't exponential growth but if you consider a ratio of GDP change in line with this growth rate, you will be able to make your own mind up pretty quickly that debt may be expanding but so too is leverage.

 

One question that is probably coming forwards at this point in time is; who or what is to blame for all of this? Is anyone to blame or are businesses simply addicted to debt?

 

US exporting monetary policy | Bank for International Settlements 160210 Slides [LINK]

 

Debt is appealing to businesses when it comes at a low cost and interest rates in the US have been very low, below the cellar door level since the onset of the Global Financial Crisis ... that is until recently.

 

It is highly possible that the US exacerbated offshore debt levels in the early stages of the 2008 economic recovery and recent capital outflows from the emerging markets are just as likely roused from recent FED rate hikes.

 

The graph shown above is an estimated impact of how the US monetary stance has affected foreign policy in nominal rates. Some countries seeing a much larger decline in rates than others, nothing is uniform of course.

 

Productivity Growth Declines | Bank for International Settlements 160210 Slides [LINK]

 

All of this would be fine, well supposedly fine if growth had occurred as an outcome of this explosion in capital but that has not been the case. Debt levels have definitely risen but growth has also retracted and that is leaving a lot of emerging market corporates sitting in a precarious position when it comes to leverage.

 

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