Bubbles Impoverish Investors Who Can’t Resist Them. Examining The Debt Bubble

January 12, 2017

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The 3000 biggest US companies have never been more leveraged.
Just this fact alone should concern most investors, but, as we have shown in previous notes, its much worse than that because this leverage is happening at a time when:
1. 10 year growth per capita in the US is as low as it has been since the 1930s depression.
2. GAAP earnings growth is unchanged over the last 5 years, and has been declining for the last 2 years.
3. On most measures US Equities are at bubble valuations.
4. Almost all the new leverage is going into buybacks and dividends, rather than business investment.
The default rate of debt continues to rise.
Financials and Junk Bonds At Odds With Credit Cycle And Financial Insiders
Financials outperform everything
Financials have been the biggest winners since the Trump election  The S&P Bank ETF KBE has rallied 29% since the election.  We’ve written about financials over the past few weeks, but it is worth highlighting again. While we may see financials rally in the short run due to momentum chasing by investors, it is much more likely we’ll see weakness ahead.  Interestingly, insider sales at financials are running at historical extremes, so clearly banks CEOs and CFOs agree with us.

The US credit cycle turned negative in late 2015, and we’ve seen tightening of lending standards in a variety of categories (commercial & industrial, commercial real-estate, consumer) and we’ve also seen a decline in demand for loans.  At the same time, we’ve seen increases in delinquencies across banks, particularly in auto lending.  Banks are very cyclical and tend to respond to the credit cycle.  Chasing banks higher when the credit cycle has turned will not turn out well.”

Yet Junk bonds have record rally as credit spreads narrow well below the default rate!

From a market perspective right now the more debt the better

Debt surges correlate clearly with short term economic boosts

Debt can not be allowed to stop growing. Look what happened when it did stop. 

Yet debt growth has to continue to accelerate faster than the economic growth it produces.
Unfortunately the longer term impact of debt is negative. Since debt took off in the 1960s as shown above, growth has been on a 50 year decline.
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Policy Makers are commited to the biggest debt bubble in history because they know they can’t stop and they are forced to accelerate!
It’s now the 9th Innings.
Are you just buying equities because the more debt the more equities will go up?
Or are you focused on surviving the biggest debt bubble in History?
How well did bubbles work out for technology in 2000 or houses in 2007?
Most Investors End Up Impoverished By Bubbles. What’s your strategy?

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