Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Election Year Cycles – What to Expect? - 4th Jun 20
Why Solar Stocks Are Rallying Against All Odds - 4th Jun 20
East Asia Will Be a Post-Pandemic Success - 4th Jun 20
Comparing Bitcoin to Other Market Sectors – Risk vs. Value - 4th Jun 20
Covid, Debt and Precious Metals - 3rd Jun 20
Gold-Silver Ratio And Correlation - 3rd Jun 20
The Corona Riots Begin, US Covid-19 Catastrophe Trend Analysis - 3rd Jun 20 -
Stock Market Short-term Top? - 3rd Jun 20
Deflation: Why the "Japanification" of the U.S. Looms Large - 3rd Jun 20
US Stock Market Sets Up Technical Patterns – Pay Attention - 3rd Jun 20
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Here's Your Insurance Against a $200 Trillion Debt Bubble Crash

Interest-Rates / Global Debt Crisis 2015 Sep 08, 2015 - 10:35 AM GMT

By: ...

Interest-Rates

MoneyMorning.comPeter Krauth writes: The world is awash in debt, and it's simply unsustainable. As worldwide debt levels keep setting new records, there's no chance anyone will ever be paid back.

Even "vampire squid" Goldman Sachs Group Inc. (NYSE: GS), with its tentacles deep into bond markets, thinks so.

The world's central banks now have an insurmountable dilemma: Raising interest rates will just increase the repayment burden. Keeping them low will only inflate the debt bubbles all over.


The sovereign debt crises we've seen over the last six years have triggered major sell-offs, but odds are high this $200 trillion global problem could start the mother of them all.

But I'm going to show you how to make a killing as the bill comes due…

Government Debt Is the "Bubbliest" of All

Global debt has mushroomed by $57 trillion since the financial crisis, and that's only up to the end of 2014.

You can see that government debt, mostly accrued in an effort to stimulate the developed world's floundering economies, accounts for the lions' share of this astronomical bill.

One of the most salient points of this chart is that while debt is up by a stunning 40% since 2007, the world has gone from debt at an already massive 246% of GDP in 2000 to 286% of GDP in 2014.

And how have we benefitted? We haven't.

Economic output has clearly not kept pace with all this extra debt.

Even St. Louis Fed Vice President Stephen D. Williamson admitted in a recent white paper that the theory behind quantitative easing (QE) is "not well-developed."

He suggests that empirical support for Bernanke's view on how asset purchases affect outcomes is "mixed at best."

Williamson considers all the relevant research to be problematic and says that "there is no way to determine whether asset prices move in response to a QE announcement simply because of a signaling effect, whereby QE matters not because of the direct effects of the asset swaps, but because it provides information about future central bank actions with respect to the policy interest rate."

No research has established a link between QE and the goal of inflation and the stimulation of economic activity.

Japan is perhaps the best example for this phenomenon, given its head start on multiple lost decades in its stock market and dire demographic outlook.

That was proved when its central bank went "all-in" to once again try and kick start economic activity through a mega-QE program at a mind-blowing pace of $712 billion annually, announced last October.

Sorry, Abe and Kuroda; inflation in your country was still at zero in July over the previous 12 months, well below the official 2% target.

There's No Way to Pay the Debt Back

The world's $200 trillion debt is almost three times annual economic output.

In my view, there is major risk of a knock-on effect from all this accumulating debt. The biggest risk could come in the form of another sovereign debt crisis.

Jeremy Grantham of investment firm Grantham, Mayo, van Otterloo & Co. LLC (GMO), with $118 billion under management, thinks so too.

Grantham gave advance warnings for both the 2000 and 2008 market crashes and thinks the United States is just asking for another such event – as soon as next year.

He's worried that could trigger something approaching the Great Depression, with a wave of government defaults that "might just break the system."

The greatly increased risk of a popping debt bubble leading to a major market sell-off highlights the value of looking at portfolio insurance.

Hedge Against Volatility with These "Insurance" Plays

As a result of the Sept. 1 flash sell-off, the Chicago Board of Options Exchange Volatility Index (VIX) shot up from around 12 to 40 – not as high as the 53.29 it hit during the Aug. 24 crash, but still astronomical.

The last time it reached those levels was, not coincidentally, in late 2011 when the markets last had a pronounced correction.

To hedge against this kind of severe volatility, consider using some of these exchange-traded funds (ETFs).

For short-term futures, consider the iPath S&P 500 VIX Short Term Futures ETN (NYSE Arca: VXX). It trades a whopping 65 million shares daily, so it's extremely liquid. Exposure is to a rolling long position in the first and second month VIX futures contracts, which reflects the implied volatility of the S&P 500.

For mid-term futures, consider the iPath S&P 500 MT Futures ETN (NYSE Arca: VXZ). It trades a respectable 500,000 shares daily. Exposure is to long positions in fourth, fifth, sixth and seventh month VIX futures.

In both cases, there is a structural bias that resets thanks to decaying futures premiums.  When markets are volatile, these ETFs can underperform their underlying index.

Alternately, you can look to buy naked puts on the S&P 500. The potential payoff is high – but note this is a very speculative, high-risk strategy that can open the door to steep losses. Only do this if you're comfortable with the idea and it fits your risk tolerance.

The reference vehicle for these puts would be the SPDR S&P 500 ETF (NYSE Arca:SPY).

For example, if you expect a markedly lower S&P 500 within the next 12 months, you can consider the SPY September 16 2016 $150 (SPY160916P00150000) puts. With the SPY currently around $190, these are only in the money if the S&P 500 drops by over 21%.

If you want the comfort of a farther out expiration date, consider the SPY December 15 2017 $160 (SPY171215P00160000) puts. These are only in the money if the S&P 500 drops by over 17%, but they are pricier thanks to the embedded value of their later expiry.

In any case, consider how much of a drop in value you want to protect your portfolio against. Also, keep in mind that options are cheaper when volatility is low, so the best time to acquire them is when markets are quiet.

Remember, calm will return, but like last week, something will come along to upset the apple cart once again. Odds are another sovereign debt crisis will be the trigger, and it could get really ugly.

Some downside protection would be very valuable at that point. The time to shop for that insurance is when others become complacent once again.

Follow us on Twitter ;@moneymorning.

Source http://moneymorning.com/2015/09/08/heres-your-insurance-against-a-200-trillion-debt-bubble/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules