November 2018 - Bubbles and Bottoms for Governments -

From France and the UK to Venezuela, governments all over the world are being challenged in many different ways. France is struggling with populism, the UK is struggling with the BREXIT, which can also be seen as a populist move. Venezuela is battling hyperinflation, Canada is arresting Chinese citizens, and in return China is arresting Canadian citizens. The US is fighting with everyone it has a trade deficit with, and Russia and Saudi Arabia have suddenly become best friends.
All of these political shifts and crises have one thing in common: they`re all a result of peaking economies and complacency among world leaders and their citizens.

Looking at emerging markets, i`m expecting more fireworks after the past year`s spectacular moves, with, as usual, increasing interest rates being the main culprit. The following chart shows the outstanding debt as a percentage of GDP, 20 years ago, 10 years ago and in Q1 of this quarter. Outstanding debt is now sitting at an average of 211% of total GDP, compared to 124% 20 years ago. Both non-financial corporates and households have increased their debts by more than 30% over the past 10 years.

Looking at the “developed” economies, we see a massive divergence happening between the German 10-year yield and the Fed funds rate. It is now at its lowest in 29 years. The past 3 times when the ratio turned negative, it has coincided with a recession.

To top off all the gloom and doom charts, I leave you with the taxes on corporate income for the US federal government. As you can see, it has fallen off a cliff over the past 2 years. You might want to explain this by talking about Trump`s tax cuts and the fact that Republicans always like to cut taxes, but if you look at the early 2000`s with Bush at the helm, tax on corporate income went through the roof. I think this chart exemplifies that the US economy is sick, and that a recession is around the corner.
The cure? Corporate deleveraging. It has taken banks more than 10 years to deleverage to a level that is “acceptable”, and I see corporate America having to go through the same deleveraging process for the next decade. This will result in rising unemployment, a stagnating economy, and most likely a lot of social unrest.

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