Less Credit and More Debt

More and more market observers fear a financial crisis in H2 2018 or in 2019. John Mauldin, David Stockman, Nomi Prins and others are pessimistic about the future. The last Newsletter mentioned some of the problems underlying this negative attitude while it seems that Wall Street has not yet priced in the inherent dangers lurking clearly in sight. The Fed has confirmed its intention to increase raising interest rates with the June FOMC meeting approving another 25 bps to bring the Fed funds target rate to 1.75% – 2.00%. This is euphemistically considered a further step towards normalization even though in present times it has become more and more difficult to be precise about what “normal” means. Two more raises are projected for 2018.

Debt levels are extremely high globally, and US federal debt now exceeds $21 trillion and will increase at the dizzying pace of one trillion per year. With the Fed raising rates, it is obvious that servicing the debt is going to become a major problem for the Treasury, which will have to borrow even more in order to pay the interest on the debt.

It is clear that with the Fed downsizing its balance sheet and the Treasury soaking up more and more capital to finance the debt, the global credit market is going to be squeezed as fewer dollars are available to function as the global reserve currency. The first signs of what can be expected have emerged in Venezuela, Argentina, Brazil and Turkey. China has also begun to reign in credit, which will most probably lead to slower growth on a global scale.

It is only to be expected that at a certain point tightening credit will have an effect on stock prices while at the same time fixed income investments will become more attractive. While it is true that official inflation figures are still low, such numbers do not take into account the rising costs for equities and homes.  The same is true for the extremely low unemployment statistics the BLS spins out. Government statistics cannot be relied upon to give a realistic picture of the health of the economy. See Michael Snyder, ICH 13.06.2018.

The conclusion is that this time is different. The debt crisis is looming, and the solutions are default or inflation or a combination of both. Given the amount of debt, which is at record highs, there is going to be a lot of pain. Governments may continue monetizing debt, but that does not really help Main Street. Woe to the workers of the world, who are still in chains.

Walter Snyder     



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