Let’s talk debt today.
Readers will know that we’ve been keeping a close watch on the global bond markets for a long time now.
Contrary to what the politicians would have us believe, there has been no deleveraging after the GFC. Quite the opposite – global debt has been growing steadily by an average of 5% per year ever since 2007 and now stands at an incredible 286% of world GDP.
As I said over a year ago, I can’t think of a time when the risk to capital has been greater. And since then that risk has just increased – substantially.
Consider this: Goldman Sachs estimates that if Treasury yields were to unexpectedly rose by 1 percentage point, US$1 trillion would be wiped out of the bond market. The leverage in the system is truly unimaginable on any historical perspective.
What this means is that should the slightest hiccup in bond markets take place, investors now stand to lose much more than they did during the US housing collapse in 2008.
With the increasing likelihood of the Fed taking away the proverbial punch bowl by raising interest rates, if only for a brief period of time, I thought it would be an opportune time to have a closer look at bond markets and how they fit into the current global macro landscape.
I recently discussed this topic with Jared Dillian, the editor of Daily Dirtnap, a market newsletter for professional investors in which he blends his astute macro insights with behavioural economics, and author of a new book called All The Evil Of This World which you can buy on Amazon.
Jared started his career working for a small market maker on the Pacific Options Exchange from 1999-2000, before moving to Lehman Brothers in 2001. At Lehmans he was specializing in index arbitrage and ETF trading and was routinely trading over $1 billion a day in volume up until 2008.
It was during his time with Lehman Brothers that Jared learned to “trade macro,” trading in multiple asset classes.
Jared shared with me an interesting theory, which I find difficult to argue with, on what the US national debt policy might very well be after the election, regardless of who’s in the White House.
We also talked about Brexit and what a potential market reaction to the upcoming referendum will likely be.
And in an interesting fashion, Jared also tackled a question I’m often asked by other investors and readers of the blog. Namely, “Why can’t the Fed just keep printing money?”