by Umar Farooq
We are in a season of time when economic conditions have appeared to be getting a little bit better in the United States, and this has blinded so many people to the truth of what is about to happen to us. America’s debt to GDP ratio is now about 352 percent. When this current debt super cycle ultimately ends, it is going to create economic pain on a scale that will be unlike anything that we have ever seen before.
There are certainly lots of signs that a global slowdown is already beginning. For example, global trade growth has fallen below 2 percent for only the third time since the year 2000. On each of the other occasions, we witnessed a horrible recession take place. Of course much of the globe is already in the midst of a horrible economic crisis. Brazil is in the middle of their worst recession ever, and people are literally starving in Venezuela. A new round of debt problems has erupted in Europe, with Greece, Portugal and Italy being the latest flashpoints.
Government debt, corporate debt and consumer debt have all been growing much, much faster than the overall economy. American’s consumer debt is not building up any future equity here. The largest category of consumer debt is student loan debt. Even at the peak of the last debt bubble, consumer debt totaled roughly $2.5 trillion. While student debt makes up about $1.4 trillion of the consumer debt here, auto debt is above $1 trillion. We’ve also seen a large rise in subprime auto debt suggesting that people are borrowing beyond their means to consume. Delinquencies are also rising suggesting any tiny slip up in the overall economy and this credit bubble can burst too.
Deutsche Banks’s European equity strategist Sebastian Raedler highlighted that, according to the latest flash PMIs, global growth momentum hit a six-year high in January.
And with global macro surprises close to their all-time high, the DB strategist says they are likely to roll over from current elevated levels, resulting in a slowdown in global growth in the coming months.
DB’s conclusion: “the equity market looks stretched”, and furthermore the bank’s proprietary exuberance indicator has continued rising above a level of 70: “in 7 out of 8 instances over the past 10 years, the market has fallen over the following month (by up to 10%, but 2% on average).”
And alongwith all this, there is no more “cash on the sidelines” – cash holdings for US mutual funds are close to a 5-year low, suggesting that little money remains on the sideline waiting to come into the market.
Bottomline is that consumer debt being over $4.1 trillion is troubling when student debt, auto loans, and credit cards are leading the way forward. Apparently we like repeating history and people may like to forget that at the root of the Great Recession was a giant credit bubble.
by Umar Farooq