by Adam Taggart
Another debt-fueled crisis & and hangover approaches
Lance Roberts sees trouble ahead.
As chief investment strategist of Clarity Financial and chief editor of Real Investment Advice, Lance issues commentary weekly on the financial markets. He sees a major market correction/crash dead ahead, likely in early 2019 as the US economy offically slides back into recession — though he’s open to it happening sooner than that.
Based on the huge debt/decifit excess that have built up in the economy, paired with the tremendous overvaluations in asset prices seen in today’s markets, Lance expects economic growth to remain anemic (at best) for the coming decade:
It’s a huge red flag. Look, at the end of the day, we can manipulate the bottom line of earnings statements all we want. But if I’m a business, look, I run three businesses, and if I don’t have revenue coming in at the top line, I can manipulate my bottom line through accounting gimmicks. I can do some weight suppression. I can layoff all my employees. I can maintain an illusion of profitability for some period of time. But at some point I’ve got to have the revenue, which is what happens at the top line of the income statement.
Just to put this into some context: since 2009, total growth of revenues for the S&P 500 is running about 30%. Bottom line profitability has grown by almost 300% during that same timeframe. Earnings per share have grown tenfold over revenue growth because of things like corporate stocks buybacks, weight suppression, employment suppression and accounting gimmicks.
We’re at record levels on debt across the board. In fact, I run a chart every now and then that shows what I call total system leverage. And what total system leverage looks at is all the debt: government, margin, corporate, personal debt, all put into one indicator. And we’re talking in excess of $120-$130 trillion of total debt outstanding right now, relative to an economy that’s growing at $20 trillion.
This is, of course, the highest level ever on record. Corporations have, of course, they’ve used ultra-low interest rates to lever up balance sheets to pay out dividends, to do stock buybacks, etcetera, and a lot of these stock buybacks that have been done using corportate leverage because it was a ‘better use of capital’: I get to write off the interest on my balance sheet in terms of what I’m borrowing on the debt plus the buyback shares and improve my bottom-line earnings. That’s been a win-win for corporations.
The problem, though, eventually, is that a lot of this debt that’s been issued is sub-quality credit in terms of investment. When you talk about investment grade investments, BBB or better, a lot of this debt that’s outstanding is BB or less. And that’s going to be an issue when two things occur: one, when interest rates rise enough that the cost of borrowing is no longer acceptable and two, when you have the next major market crash that causes a massive deleveraging cycle in the markets — and that will be triggered by an increase in interest rates from the Federal Reserve.
So America can slash taxes; do the things it wants to do — like trade wars and tariffs — but all it’s going to do is negatively impact the economy because of the fact we’re running $21 trillion in debt. And we’re going to run a trillion-dollar deficit by the end of this year, one that’s going to become $2 trillion over the next five years. With this growth trajectory of debt and decificts, economic growth can only go substantially lower over the next decade.
Click the play button below to listen to Chris’ interview with Lance Roberts (53m:51s).