Who will rescue the rescuers?

The latter half of the week will be more fun than the former as we get the result of the ECB meeting on Thursday and the release of GDP data for the US and UK economy on Friday. The former part of the week is dominated more by Purchasing Manager Surveys and what is happening in the bond market. European flash PMI’s stabilised after a couple of months of dipping lower, encouraging likewise for the US economy. This along with a slight cooling in trade war worries helped equities start the week on a solid footing.

US Treasury yields are pushing up against 3% once again as the global bond sell-off continues. The gap between what you receive from a ten-year treasury and the equivalent German bund is now at a twenty-nine-year high. This would reinforce our view that for US treasury yields to move higher again, German bond yields would have to follow suit. The trigger for that may be this Thursday’s meeting of the ECB, a more hawkish statement from the ECB could cause a further sell-off in bond markets. Three pct. yield for US Treasuries, according to press reports, could be the catalyst for the next bond bear market.

The IMF highlighted last week the amount of debt, 164 trillion dollars to be precise, in the global economy. Global leverage is higher than it was in 2007, almost 230 pct of global GDP. The US owes about 48 trillion dollars of the 164 trillion. Bailing out the global economy in 2007 is the root cause of the significant increase in the global debt burden. The problem will come as the existing outstanding debt matures and needs to be replaced if interest rates start to rise. The cost of debt will increase as a burden on the economy. There also becomes a restriction on raising further debt to provide for investment. The game is the same for every economic cycle, just the numbers get bigger.

Economic growth cannot be undermined as the debt burden would just increase further. With so much debt outstanding currently it would also appear much harder for governments to raise further capital to stimulate as they did to recover the 2007 fiscal crisis. Governments came to the rescue of the bankers last time, one must wonder who would come to the rescue of the governments during the next financial crisis?

Posted on April 25, 2018 .