Bonds, Bubbles, and Record Global Debt

Written by Nick Hodge
Posted March 4, 2020

The coronavirus is allowing the stock market to reflect some of the economic and monetary problems that have been simmering under the surface. 

It’s not going to cause millions of deaths and mass panic. 

But it is going to slow the global economy. And in that respect, it could end up being the prick this bubble was looking for. 

The impacts are already severe and their full effects won’t be felt for some time. 

U.S. gross domestic product for 2020 — already forecast to be a sluggish 2% — is now expected to be just 1%. And that’s after only 100 reported infections in the country. There will be thousands more. 

Dozens of companies, including Apple (NASDAQ: AAPL), Mastercard (NYSE: MA), and United Airlines (NASDAQ: UAL), have already cut revenue and/or profit guidance. And again, the full impact won’t be known for some time. (Car sales were down 80% in China in February, just as one example.)

Yes, the stock market has seen some incredible volatility lately as it tries to price all this in. The S&P 500 just had its worst week since 2008, with over $6 trillion thrown in the fire barrel. 

Bond yields have fallen to record lows. The 10-year Treasury bond (or note or T-Bill) fell below 1% for the first time EVER this week. Money rushing into bonds and driving their prices up (and yields down) means global investors are looking for safety. 

10-year treasury bond below 1%

The fact that bond yields are at all-time lows indicates investors are seeking safety like they never have before.

With stocks and bonds falling off a cliff the Federal Reserve stepped in this week with an emergency rate cut — trimming its target rate by 0.5% to 1-1.5%. 

Here’s the Financial Times yesterday:

This is particularly important because much of the debt build-up since the global financial crisis of 2007-08 has been in the non-bank corporate sector where the current disruption to supply chains and reduced global growth imply lower earnings and greater difficulty in servicing debt. In effect, the coronavirus raises the extraordinary prospect of a credit crunch in a world of ultra-low and negative interest rates.

Policymakers in advanced countries have over the past week made clear their readiness to pursue an active fiscal and monetary response to the disruption caused by the virus. Yet such policy activism carries a longer-term risk of entrenching the dysfunctional monetary policy that contributed to the original financial crisis, as well as exacerbating the dangerous debt overhang that the global economy now faces.

That is the fancy way of saying the Fed has backed itself into a corner. And the market knows it. Which is why the Dow careened down another 1,000 points after the Fed gave it another shot of rate cuts this week. 

The market knows a rate cut can’t combat $13.5 trillion in outstanding non-financial corporate bonds that will be unserviceable in any sort of economic downturn.

And the market is wondering how the entire financial system would be impacted if that happens. 

Debt, of course, is back to levels not seen since the last financial crisis. The ratio of debt to gross domestic product hit an all-time high last year of 322% — with total debt close to $253 trillion!

Record High Global Debt

These are the real reasons volatility is back in the stock market. Coronavirus is simply threatening to blow it all up sooner. 

But it doesn’t have to be all bad. It’s a heckuva time to refinance if you have mortgage debt. You can lock in 30-year rates right now below 3%. 

There are other steps I’m taking as well. 

Here’s what I see coming and what I'm doing to prepare. 

Call it like you see it,

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Nick Hodge

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Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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