The world’s finance markets are ill-prepared for what’s coming

Two articles in the Telegraph point out aspects of the current international finance market that are likely to affect all of us in the short term.

First, Ambrose Evans-Pritchard points out that the bond market is still in dire straits.

One by one, the giant investment funds are quietly switching out of government bonds, the most overpriced assets on the planet.

Nobody wants to be caught flat-footed if the latest surge in the global money supply finally catches fire and ignites reflation, closing the chapter on our strange Lost Decade of secular stagnation.

. . .

The UBS bubble index of global property is already flashing multiple alerts, with Hong Kong off the charts and London now so expensive that it takes a skilled worker 14 years to buy a broom cupboard of 60 square metres.

. . .

As of late November, roughly $6 trillion of government debt was trading at negative interest rates, led by the Swiss two-year bond at -1.046pc. The German two-year Bund is at -0.4pc.

. . .

This is a remarkable phenomenon given that global core inflation – as measured by Henderson Global Investor’s G7 and E7 composite – has been rising since late 2014 and is now at a seven-year high of 2.7pc.

. . .

Inflacionistas in the West have been arguing for six years that the QE-fuelled monetary base is about to break out and take us straight to Weimar or Zimbabwe. They failed to do their homework on liquidity traps.

Yet their moment may soon be nigh. Catalysts are coming into place. Globalisation is mutating in crucial ways.

China, the petro-powers and Asian central banks led a sixfold increase in foreign reserves to $12 trillion between 2000 and mid-2014 (and trillions more in sovereign wealth funds). This flooded the global bond markets with capital and stoked asset bubbles everywhere.

The process has gone into reverse. Data from the International Monetary Fund show that these reserves dropped by $550bn in the year to June as capital flight and the commodity bust forced a string of countries to defend their currencies. Saudi Arabia is still burning through $12bn a month to cover its budget deficit.

This shift in reserve flows amounts to fiscal stimulus for the world. Less money is being hoarded as capital: more is going back into the real economy as spending – or it soon will do – exactly what the doctor ordered for a 1930s world, starved of demand.

. . .

All the stars are aligned for an end to the deflationary supercycle, and therefore for an end to the 35-year bull market in government bonds.

With equities already at nose-bleed levels it is hard to know exactly where to seek refuge.

There’s more at the link.

In case you think this won’t affect you, consider that our society is awash in debt.  Look at this chart from the article referenced above.

The total debt in most of those nations is at astonishing levels.  For example, if one views GDP as the amount ‘earned’ by a country in a given year, then the US owes almost two and a half years of its national income just to pay off the debts it and its businesses and residents have incurred.  That’s like an anchor, holding us back from greater or faster economic growth.  Too much of our current income has to be devoted to servicing old debt, rather than financing current and future needs.  Imagine if your household owed so much money that your total income for the next two and a half years would be required to pay it off.  How could you do that while still retaining enough money to live on?  It would mean cutting out luxuries and discretionary purchases, and concentrating solely on essentials until the debt was paid.  That would take a very long time . . . and while it was being paid off, your money couldn’t contribute to your local economy’s growth and development.  Sovereign economies aren’t the same as households, of course, but in many ways the comparison is still valid.

The debt crisis has been fueled by repeated rounds of quantitative easing (QE), the funds for which were ‘raised’ by the nations concerned through issuing government bonds to that amount (even though most of the bonds were bought by central governments or their central banks, like the Fed, in an incestuous self-serving money-printing charade that fooled nobody).  The funds thus raised have already been distributed to banks and other institutions, who’ve used them to shore up their balance sheets and deal with bad debts (at least, the wise ones have;  there are unwise ones who haven’t, as we’ll see in a moment).

This affects all of us.  For example, it means that the mortgage on your home is probably funded to at least some extent by QE.  Miss D. and I are seeing this right now at first hand through the Texas bank dealing with the mortgage on our new home.  We’re prime-credit customers, putting down a 20% deposit on our home and having income more than adequate to support the monthly payments;  yet lenders in the bond market are quibbling over tiny issues, wanting higher interest, and running scared of anything that might expose them to greater risk.  We’ve got our financing, but less credit-worthy customers are finding it much harder (not to mention more expensive) to do so.  Just like Mr. Evans-Pritchard, lenders can see the writing on the wall, and its message is distinctly discomforting.

Banks in Europe appear to have been less than wise in how they’ve handled the ‘hangover’ of bad debt resulting from the so-called ‘Great Recession‘.  The Telegraph reports:

Europe’s banks are barely increasing lending because they are still weighed down by bad loans, the European Banking Authority (EBA) said, warning that the burden is greatest on the smallest lenders.

A total of €1 trillion of loans are non-performing, hampering efforts to get banks to make new loans to households and businesses that want to spend more or invest … On average, European banks have twice the level of non-performing loans as their US counterparts, which took more action in the wake of the financial crisis to recapitalise and improve their balance sheets.

. . .

The EBA said loan growth was fastest in countries and by banks with stronger capital ratios, indicating that those which have built up their financial buffers and cleaned up their balance sheets the quickest are the most able to lend.

As a result, the official body warned that those banks which have low capital buffers and high levels of non-performing loans are less able to lend and to support economic growth.

Again, more at the link.

This is the root of what’s called a ‘liquidity crisis‘.  When banks refuse to – or simply can’t afford to – lend money, because their balance sheets are too weak to do so or they have to hoard their reserves to cover existing bad debts, this impacts economic activity on a very wide scale.  Remember the US housing market crisis of 2007/2008?  There were plenty of houses for sale . . . but no mortgages available with which to buy them.  Only buyers who had lots of cash and were prepared to put it on the table, or had extraordinarily good credit and were thus acceptable risks in the eyes of lenders, were sure of being able to buy what they wanted.  The rest of us were out of luck.

That’s how it is in much of Europe right now.  That’ll affect us as well, because even if US banks are on a more sound footing, much of our economic activity consists of international trade.  If our trading partners can’t afford to buy our goods and commodities, and can’t afford to produce what we need to buy from them, we’ll be hurting right along with them.  This is already happening, of course, as evidenced by the downturn in the transportation of goods from producers to markets.  Last week the Baltic Dry Index fell below 500 for the first time in its history . . . a strong harbinger of bad times to come.

The Bible tells us that “the love of money is the root of all evil“.  Unfortunately, the lack of money is at the root of a great deal of economic evil, too . . .



  1. I shake my head in disbelief and wonder, "What will eventually be the 'panic' trigger?"
    And I'm amazed we've gotten this far without someone yelling "FIRE" in the theater.
    A chicken with its head detached will still look as if it's alive for a while.
    Is that a good analogy for today's economy?

  2. We didn't finance through an institution. We went owner-carry. Our interest is a bit higher but as long as we cxan make the payments, and we have moneyvsetcaside forvtyhast, we're at least have/a roof. Considering buy out early though.

  3. With the last house I financed I lived a very Spartan existence for the first few years – if you examine the amortization table on your loan you'll see huge amounts going to interest, a pittance toward principal at the beginning. Doubling, tripling, quadrupling or quintupling principal payments early in the loan moves you down the table at a fast clip into territory where a much more substantial portion of your regular payment goes to principal. One can reduce the mortgage length by years in a matter of months, opening many options. It's not that hard to trim a decade or more off a 30-year mortgage, saving huge amounts in interest. Worst case, after a surprisingly few years of making extra principal payments one can refinance what's left to obtain lower payments.

    The cardinal rule with houses is to own none of it or all of it; owning none of it places the mortgage holder in the position of it not being advantageous to foreclose because there's not enough asset value there to recover their money, owning all of it means you don't owe anyone anything (except for the $@#& government property taxes…..)

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