Since 2000, according to the folks at McKinsey & Company management consultants, global debt (household, non- financial corporates, and government) has increased from $64 TRILLION to $169 TRILLION . Through all of history, until Y2K, we managed to “only” accumulate $64 TRILLION ... And in the last 20 years, we from $18 TRILLION to $43 TRILLION , corporate debt from $25 TRILLION to $66 TRILLION , and government debt from $21 TRILLION to $60 TRILLION . Keep in mind, this is all in TRILLIONS of dollars! The good news is that global GDP also accelerated broadly, driven by astounding growth in China, India, and Brazil... Remember BRIC?... The world’s leading emerging economies, namely Brazil, Russia, India, and China?... (And now, alas, pretty much reduced to the ICs, pronounced “ick.”) The bad news is that while plenty of debt growth was aligned with GDP growth in these markets, the rate of growth in debt in developed markets far outstripped the relatively pedestrian GDP growth from Europe and the U.S... With the U.S. – the home of the global reserve currency – leading the pack by a margin akin to Secretariat’s in the Belmont Stakes! While the growth in U.S. government debt and entitlements has profound implications on the value of the dollar and its status as the global reserve currency, I believe that these challenges will likely not emerge over the shorter term... Rather, they are more likely to impact 5 to 15 years from now. have added over $100 TRILLION ... Global household debt has increased
Of real short-term concern is the U.S. non- financial corporate-debt situation, which now stands at 45% of GDP (a record, post- WWII high) at a time when our GDP is at a record high and is growing nicely with a 3% (sustainable?) trend. But what will this look like as GDP slips in a recession? In 2000, the Barclays bank’s index of total investment-grade bonds was a little under $1 trillion... with BBB and A-grade outstandings each at about $350 billion. Today, by the same measures, total outstanding debt has risen to over $3.5 trillion with BBB issuance over $1.8 trillion – an increase of $1.2 trillion since just 2007. While that is scary enough in itself, what makes these record-high debt levels even more troubling is that the debt is attached to companies with materially more leverage than we have ever seen. The median rating for public corporate-bond issuers today is BB... 15 years ago it was BBB... and 28 years ago, when we had our last real corporate-debt meltdown, it was BBB+/A-. So the relative and absolute levels of investment-grade debt are extremely high and the relative quality of the issuers is substantially diminished. What could be worse? Sadly, there is worse... The average leverage as measured by debt-to-earnings metrics has also risen. BBB debt in 1990 was on average 2x the EBITDA. Today, that is 3.2x... a record-high level for times when earnings are strong. Single A leverage by the same metric has risen from 1.5x to 2.9x. In essence, risk has substantially increased within the ratings, before any signs of a recession, and before factoring the aforementioned astounding growth in nominal terms.
A frequently heard phrase from real estate investors, emerging market participants, corporate lenders, investment bankers, and investors was... "Please god, let there be another bubble and I promise that I will not piss
it all away this time."
American Consequences 69
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