Looking at Where Debt Has Gone: A Review

For my friend Jonathan Loh.

Talking about economics is not my forte, but a reader requested for my opinion on this particular article so here it is.

In summary, the chief of MAS, Ravi Menon - suggests how the next market crash will come along.

Market crashes are as a general rule, bad. People lose money in the markets (largely through hysteria rather than actual realized loss), spikes in unemployment and retrenchment, stuff like that.

Below are the three reasons Ravi Menon gave for why the market will crash and my general thoughts on them.

a) Build-up of leverage in emerging market economies

In layman terms, this statement suggests that countries that are considered ‘emerging’ – non-first-world countries that are developing rapidly – are borrowing money or being invested in at a disproportionate rate, or with disproportionate amounts.

The risk to this is of course, what typically happens when you lend someone money. If they don’t pay it back, everyone involved suffers somehow.

In 2019 and 2020, some several hundred billion dollars needs to be paid back, and the whole world is terrified that it won't be.

When I talk to more financial-savvy clients, they bring up two particular reasons as to why there is such a huge amount of leverage in Emerging Markets (EMs).

The first is that there more balanced potential yields. Bonds in EMs often have some international ties where there’s more incentive to deliver them perfectly. These EM bond yields are often higher than Singapore and US’s bond rates, easily hitting hit 4% annualized or more.

The second thing is being spoiled. 20, 30 years ago, bond rates in efficient markets like the US were much higher than they are now. People who have experienced that kind of bond are unlikely to settle for the low interest bond rates that you get now, despite having far more security.

As a result, they prefer to invest in EM Bonds as despite the higher volatility, they still give higher returns.

Additional thoughts:

Diversification of bonds through bond funds is not only quite common, but is actually easy to do.

Even by investing through US fund managers, who don’t hold a candle to domestic fund managers in the EMs – bond funds often outperform the bond indices they are attached to. With a reduced risk and increased return – it’s no wonder people invest in EM bonds rather than local ones.

Having the debt of a country increase isn’t necessarily bad.

We technically have more debt than quite a few of our neighbors, but there’s a difference between good debt and bad debt. And at least politically speaking, most of our recent debt is good - we're not borrowing money to recover from a natural disaster or whatever, it's being invested. Of course, few countries are as financially healthy as Singapore...but the

Based on the rationales provided above (higher risk for higher reward), I’d just invest in equities but I understand that people 20 or 30 years older than myself (I’m 26) may not have that kind of investment time horizon to ride out volatility and recovery.

b) The shift of leverage from banks to non-banks

This basically means that loans and funding are coming from non-banks rather than banks. It typically refers to alternative financing, though it can be even as simple as getting financing from your own family.

If anything can lead to a collapse in the global economy, I personally think this might be it. I'll talk about this point from the point of modern entrepreneurship.

(However, since I’ve worked with start-ups for close to two years, I’m kind of biased.)

2018 in particular, aside from being a hellhole for most global equities*, it’s also been a terrible year for my search of quality entrepreneurs.

*I’ll discuss this further soon from both a global and personal perspective.

After years and years of blinding themselves to the truth, people are finally starting to catch on – if you want money beyond your current qualifications, you have to run a business.

With the emergence of e-commerce, low start-up capital required, it’s quite possible to make more money online rather than by competing in the rat race.

The problem with this, is little capital or no, you need a viable idea and you need to work very hard in order to make it work.

The pioneers of e-commerce understood this well, Meanwhile, people who enter later just hear and see 'easy' money. If you weren’t even willing to work harder than most in school or at your job, it would be hard for you to find success in your own business. Discipline is much more of a factor in business than passion or ability.

New businesses eventually get to a point where they need a substantial amount of funding and they often can’t get it from financial institutions with more security measures, such as banks. And if they can’t get their money from banks, they’re going to find other ways to do it with little guarantee to the investor that it’ll be paid back – or as quoted in the article – ‘varying degrees of regulation’.

As more and more people try entrepreneurship, this trend is likely to rise.

FYI: This lack of security is also reflected in other forms of debt like credit card debt, home mortgages etc. On a whole, debt is moving towards a really unsecure direction!

Additional thoughts:

Personally, there are a lot of safeguards a non-institution can take in order to make sure their loan or investment is secure. The expected return is also much higher than a typical bond, or if you find the next Apple or Amazon, you’ve basically lucked out.

But from my experience, I see a lot of people with bright ideas who not only haven’t figured out the financial aspect, but just aren’t that willing to work hard.

To learn more about this, you can watch Shark Tank.

c) An increase in corporate bond issuance globally

There wasn’t much elaboration on this, but it’s very similar to the first two points. However, it was specifically noted that there is an additional risk factor in the fact that most of these bonds were US-denominated.

To be fair, c) is a moot point because the amount of US monies in the market has always been disproportionately higher than any other currencies. It is why people refer to the US as being ‘the market’ and why some low-cost index investors tend to behave as if the other countries didn’t exist. \

So like, okay. What else is new? :/

Corporate bonds typically don’t have as high a credit rating as government-issued bonds, but these tend to vary anyway.

Ultimately, debt is only as bad as what it’s being used for and the interest rate applied.


Debt could be the reason for the next financial crisis. Who know? But really, who cares?

Investment returns survived the 1997 Asian Financial Crisis, the 2000 Dot-com crash, the 2008 Financial Crisis and many more. No matter how many crises happen, investing will always be much, much, much better than leaving your money in the bank simply because your overall return will supersede any volatility risk.

You have to realize that banks are investing your money regardless of said crashes anyway, so you have to do the same.

Does this mean that banks are also investing during the crises, so you should just invest yourself too and get better returns on the whole?

At a very achievable 7% return rate, an investor would make more money in 3 days than someone who leaves their money in a savings account for a year.

Financial institutions make more money than you. Think like an institution, make money like one.

Don’t live in fear.

Don’t be a sheep. #investing #moneymaverick #debt #marketcrash #investment #fund #bonds #leverage #emergingmarkets

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