The global debt system is a house of cards. Countries are lowering rates and pushing debt levels higher to stay competitive. This is useful for near-term expansion but it’s not sustainable. Some countries are even jumping into negative yield territory to keep the party going.
Total global debt with a negative yield is almost $17 trillion. This is unprecedented and total debt continues to climb to dangerous levels.
An illustration comes to mind… countries with nuclear weapons can obliterate other nations. So if one country launches a missile first, it could create a chain reaction. This could lead to Mutually Assured Destruction (MAD). Imagine Trump, Putin, and other world leaders standing in the same pool of gasoline. Trump has seven matches and Putin has three matches. It doesn’t matter who lights the first match, everyone will burn.
Back to the money world. Debt isn’t inherently bad. It can be an efficient way to move resources and speed up innovation. Although, debt levels are reaching new highs. Here’s a chart with the total U.S. federal debt and debt-to-GDP…
In comparison, Japan’s debt-to-GDP has had a similar path and climbed even higher, above 200%. The Fed and other quasi banks have spurred debt levels by artificially pushing down rates.
This trend has also gotten worse thanks to “too big to fail.” For example, if the U.S. owes China $100 million, no big deal. But if the U.S. owes China over $1 trillion (real number), that also becomes China’s problem. If the U.S. defaults, China will lose a lot more than that amount. It will stifle total world trade and other output. So countries continue to dangerously leverage up together.
They’re experimenting with new monetary and fiscal policies to curb recessions and improve the economy. Although, their bag of tricks might not perform as expected long-term. Past quantitative easing and dropping rates could lead to a worse outcome. They’re kicking the can down the road.
Already, warning signals for another recession are flashing from a wide range of indicators. I’ve pulled together some of my favorite indicators here: Stock Market Crash 2020.
Negative Interest Rates and My Investment Strategy
Negative interest rates flip the notion of saving upside down. You end up losing money on a nominal level when you save. For example, Germany recently sold $965 million worth of 30-year bonds with a negative 0.11% yield. So investors – holding to maturity – will lose just over $1 million on the deal. That’s insane… even after factoring in currency appreciation.
The good news is that you don’t have to accept those negative rates. You can move your money around to where borrowers treat it best. Although, negative interest rates might be knocking on your door soon, with the help of heavy handed governments.
It’s an exciting time that might lead to a new normal… but I’m proceeding with caution. I’m avoiding many investments at current valuations. With cheap debt sloshing around, investors have pushed up most asset prices across the board.
So where’s my money? A good chunk of my wealth is in 3-month U.S. treasuries earning above a 2% yield. I’m waiting for better equity buying opportunities. Here’s my watch list of 10 value dividend stocks.
Invest mindfully,
Brian Kehm