The Elephant In The Room: Debt

US Monetary Base

Note how the monetary base is contracting. That usually is warning sign as funds are being withdrawn from the financial system.


With the surge in the amount of money “sloshing” through the financial system because of QE, abnormally low interest rates and the surge in debt, the funds found their way into the stock market and real estate, setting up the potential for financial bubbles. Global stock markets have surged since 2009 with a couple of shallow interruptions along the way in 2011 and 2015/2016. Witness since the lows of 2009 the S&P 500 is up 270%, the London FTSE is up 116%, the Paris CAC 40 is up 112%, the German DAX has gained 247%, the Chinese Shanghai Index (SSEC) has jumped 94% but was up 211% at its peak in 2015, while the Tokyo Nikkei Dow (TKN) has gained 186%.

Canada’s TSX Composite has been a bit of a laggard gaining only 104% as it is constrained by its heavy exposure to energy and materials two areas that have not done particularly well since 2009. The TSX Energy Index is actually down 6% from the lows of 2009 while the TSX Materials Index is up 46%.

Real estate prices have surged since 2009 not just here in Canada but generally around the world. Housing prices have surged anywhere from 70% to well over 100% here in Canada since 2009 depending on what type of housing it is and location and city. Toronto and Vancouver have experienced the biggest surge in prices. But prices have surged in the US as well even though in many respects they remain below the peaks of 2006. In Europe, Asia and elsewhere real estate has surged all fueled by low interest rates and abundant money available for mortgages.

Are the bubbles over yet? Probably not, as bubbles have a tendency to rise further than the bears expect. While the gains have been impressive, the stock market for example remains well below previous bubble market gains.

But trouble is on the horizon even if it has not hit home just yet. Interest rates are rising but are not yet at a point where they could cause a crash. Watch the spreads between 2-year and 10-year government debt. Currently, they are positive but if they turn negative it is usually a bad sign. Delinquencies are rising, particularly on commercial and industrial loans but also on consumer loans in North America and the EU. In China, the $2 trillion mortgage market is teetering and many believe it looks like the US sub-prime market in 2006/2007.

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Moon Kil Woong 4 years ago Contributor's comment

Debt is the Whale in the room not an elephant. The weird thing is that low rates do 2 things. As we all know it encourages undue amounts of debt and lowers savings, but even worse it decreases the amount of money generated by savings, thus adding to further credit erosion and weakening spending further.

This is the mess the central banks have gotten us in which is the same as Japan got into. We now have mass asset inflation which means unaffordable housing, a close to dead economy, artificial money production through the central bank (QE), and mass debt. As the British would say, a fine mess. It is exactly that type of mess they hoped to get out of by exiting the EU. Economically speaking they are not our friends. They are running away from the planned economy socialist ideas that are destroying America and Europe disguised as capitalism. It is far from it.