July 2018 - Summary -

Consumer debt, corporate debt and government debt have all been ballooning over the past 10 years fuelled by low interest rates and Quantitative Easing by Central Banks all over the world, attempting to stimulate economies. The results of this 10-year stimulus are that stock markets all over the world are at all time highs and property prices have once again gone through the roof worldwide, notably in New Zealand, United Kingdom, Australia, Norway, Canada and the U.S.

While consumer debt as a percentage of GDP has actually slightly declined, corporate debt has continued to push ahead, likely creating the new victims of the next economic downturn once interest rates will increase to levels that can be seen as “normal”.
Cheap credit fuels bubbles, this is a fact. The next question will then be; where are the bubbles blown? With the third question being; what will be the “pin” and which bubbles will be popped first? In this newsletter i`ve given plenty of examples of bubbles, and by now you probably realize that rising interest rates will likely be the pin. Which bubbles will pop first? And what domino effect will it cause? I would put my money on private and listed companies who have not been able to be profitable, even though the economic climate has been relatively favourable. They won`t be able to pay off their debts, dragging along employees, lenders and suppliers on the way down. The first dominoes might fall in China and Japan before reaching Europe and the U.S. 

Will governments and Central Banks allow this to happen? Most likely not. What can they do about it? Continue the path they have taken, keep interest rates low, keep on printing money, and inflate their way out. By creating high inflation or dare I say it, hyperinflation, it will become cheaper for governments to pay off their debts. They can push a proverbial reset button, create an absolute economic mess while they`re at it, and start with a clean sheet.
This is of course a theory that I wouldn`t want to see happening, but it`s always good to think of the why, how and when, and then prepare yourself accordingly. We roughly know the “why”, we can estimate the “when”, but how this all will play out, is still a big question mark for me, and I would love to brainstorm about it with you!

Thank you for reading, and don`t forget to stay positive!

Robbert-John Sjollema

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