Submitted by Keith Dicker of IceCap Asset Management
What goes up can also come down
Whether unknowingly or not, the media and the investment industry has created an information gap wedging the 2008 debt crisis with today’s debt crisis. Chart 4 shows the difference in debt outstanding from 2008 compared to today. The Public Sector consists of government and tax payers, while the Private Sector is made up of individuals and companies.
Notice the enormous gap that has developed between the two groups over the last 6 years. This is the part that isn’t talked about by the big banks, fund companies and advisors with their clients. The debt crisis was never really resolved. Instead, governments decided to simply transfer the debt problem from the private sector to the public sector.
This is important as it is one of the key reasons for the current crisis.
As a result, capital markets were never allowed to reset. Instead, our governments and central banks have created a financial environment where traditional savers receive little to no interest on their cash deposits, and an economic environment whereby sophisticated investors are slowly withdrawing investment.
This combination is creating deflationary trends around the world, and it is causing the Velocity of Money to plummet. Ironically, this central-bank induced economic combination, is causing central banks and governments to do even more of the same. Insanity at its best.
At some point very soon, this financial-spin-top will lose a few riders and the key one to watch is the government bond sector. Chart 5 illustrates the size and difference between the bubbles in our all too recent past.
And as they say in California – the next one will be a big one. As the bubble in government bonds blows higher and higher, the following investment groups will become considerably risky:
– Government bonds
– Bank & insurance stocks
– Pension funds
– Target Date Mutual Funds
Practically every investor in the world has exposure to the bond market, as well as bank and insurance stocks. Some investors have little exposure while others have a lot of their eggs in this seemingly low-risk basket.
We’ll next explain why we are nervous about these, 4 investment groups (page 9) and then go into greater detail about each one in future Global Market Outlooks.
First, note the following amount of global debt outstanding.
Next, note that over $58 TRILLION is owed by governments, and over $45 TRILLION is owed by banks and insurance companies.
Also, understand that banks and insurance companies are required by regulators to hold safe investments as their capital.
And finally, understand that regulators say government bonds are recognised as risk-free investments and therefore should make up the majority of a bank’s capital.
So, if you accept our view that government bonds are in a bubble phase and that eventually this bubble will burst, governments as well as anyone holding government bonds will be affected the most.
And because banks and insurance companies invest their required capital in government bonds, they are extremely vulnerable to a popping of the government bond market. To summarise, the groups who hold a whole bunch of government bonds include:
– Bank & insurance companies
– Pension funds
– Target Dated Mutual Funds
* * *
Continue reading below
Your rating: None Average: 3 (2 votes)
powered by sue.ng a legal search engine