Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How Private Sector Debt Bubble Could Trigger the Next Financial Crisis

Interest-Rates / Financial Crisis 2019 Mar 07, 2019 - 01:25 PM GMT

By: MoneyMetals

Interest-Rates

The $22 trillion official national debt is a much discussed problem, even as politicians exhibit zero motivation to do anything about it. But as big an economic overhang as it is, government debt isn’t likely to trigger the next financial crisis.

Yes, servicing the growing federal debt bubble will depress GDP growth, cause the value of the dollar to drop, and raise inflation risks. But the bubble itself won’t necessarily burst – not anytime soon.

As long as politicians face no political consequences for deficit spending, and as long as the Federal Reserve keeps the Treasury bond market propped up… then many more trillions can be added to the national debt.


Meanwhile, more fragile debt bubbles exist in the private sector. Unlike government debt – which carries the implicit backing of the Fed’s unlimited printing press – debts incurred by corporations, investors, consumers, and students can default.

Globally, there exists $250 trillion in debt against economic assets of around $100 trillion. The notional value of all derivatives now approaches a quadrillion dollars.

It’s been called the “everything bubble”… and it could soon lead to the “everything bust.”

U.S. household debt rose to a record $13.5 trillion in the fourth quarter of 2018. Mortgages, student loans, car loans, and credit cards represent enormous burdens even during a good economy. These burdens will prove unbearable for millions of Americans in the years ahead.

For many the financial crisis is already here:
  • Pending home sales have fallen on a year over year basis for 13 consecutive months.
  • Farm loan delinquencies recently hit their highest level in 9 years.
  • More than 7 million Americans are delinquent on their auto loan payments – an all-time record.
  • Some 5.1 million people are in default on their student loans.

Student loans now rank as the second largest biggest category of American consumer debt, just behind mortgages. The cruel reality is that many of these “gender studies” and “art history” type degrees will never be worth as much in the job market as they cost to obtain.

The main consequence of the government-subsidized student loan bubble is to enable college tuitions and fees to rise at a much higher rate than salaries. It’s not that universities have had to raise costs to pay for top-notch professors.

Instead, the biggest growth in university hiring has been for administrators and “Diversity” indoctrinators who get fancy titles and plush salaries while providing little to no useful instruction.

It’s just one example of how easy money and distorted government incentives lead to malinvestment.

Another example, of course, is the stock market…

Investors in search of returns have bid up stocks to bubble heights following years of artificially depressed interest rates. Big corporations have tried to manipulate their own share prices higher by engaging in leveraged stock buybacks, even at lofty recent valuations.

Warren Buffett defended stock buybacks of Berkshire Hathaway in his latest letter to shareholders while noting such practices can be destructive if done regardless of value:

“Assuming that we buy at a discount to Berkshire’s intrinsic value – which certainly will be our intention – repurchases will benefit both those shareholders leaving the company and those who stay…. Obviously, repurchases should be price-sensitive: Blindly buying an overpriced stock is value-destructive, a fact lost on many promotional or ever-optimistic CEOs.”

A composite of equity leverage including margin accounts and leveraged exchange-traded products shows total leverage at an all-time high last December. A deleveraging event started to take hold into Christmas… until the U.S. Treasury Secretary convened the “Plunge Protection Team” and Federal Reserve chairman Jerome Powell turned dovish.

The Fed faces another potential deleveraging event just around the corner in the corporate bond market.

The U.S. investment-grade corporate bond market has swelled to about $5.2 trillion, according to Bloomberg. That represents an increase of more than $3 trillion over the last 10 years.

Even more alarming, around half of these “investment grade” bonds are just one tier away from being rated as “junk.”

Between now and 2021, an unprecedented spike in outstanding commercial debt comes due. That could be a disaster, especially if credit spreads widen and/or interest rates go up across the board.

Investment Grade Debt Maturing (Billions)

nvestment Grade Debt Maturing

Source: Wells Fargo Securities, Bloomberg

Another potential bubble unwinding to come is in stock market index funds. Passively managed index funds have grown from 4.5% of total U.S. stock market assets in 2002 to 17% in 2018.

The late John Bogle, founder of Vanguard and index investing pioneer, turned skeptical on the outsized growth of index funds prior to his death. Perhaps these vehicles had become “too successful for its own good,” he said.

The fundamental problem is that index funds assume an underlying efficient market where securities analysis and market discovery takes place.

When the largest shareholders of all the blue-chip stocks are index funds, valuations can get distorted.

The share prices of bad companies can get artificially propped up during bull markets. And during bear markets, when scared investors are selling index funds, solid companies can be unfairly marked down.

High-frequency program trading has come to dominate “stock picking” – and when the algorithms turn bearish on market trends, they can all follow each other in triggering cascading sell orders.

The next stock market crash could initially bring down all markets, including commodities. But any threat of deflation will trigger a massive inflationary response from the Federal Reserve.

Inflationary assets such as precious metals stand to benefit. Gold in particular will also tend attract safe-haven demand and hold up better than risk assets when the “everything bubble” bursts.

Stefan Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.

© 2019 Stefan Gleason - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 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