Monday, July 10, 2017

Chasing the next credit bubble. It feels best right before it pops.

A recent tweet by Kevin Smith of Crescat Capital  (someone I've had the pleasure of meeting in person) reminded me of just how far we've come since 2008 and the Great Recession.

By how far we've come I'm not meaning in a positive sense.  If you look at the selected ratios of debt to GDP for Canada, China, and Australia they've each grown tremendously since 2008/09.   While this has helped goose growth in each of their respective economies (and spilled out into the greater world as well)  it does not bode well for the future.  The thing about debt is it need to be paid off.  Somehow, someway (by default, payment or inflation) the ratios will drop when they reach such lofty heights.  

Crescat capital annotated the above chart rather nicely showing you the negative events which coincided with either a rapid rise in debt to GDP (like Thailand) OR a high ratio overall (Japan, USA, Spain)  Their implication is Canada, China, and Australia are heading toward a likely credit crises and I'm inclined to agree with them.  

These are not the only shimmering spheres on the horizon however.  Look below and you can see all three of the Scandinavian countries are above US levels before our little economic problem in 2008.

Source: Federal Reserve (link)

The challenge with calling the tops in a bubble is you are battling central bankers and their willingness to keep the debt flowing.  Who wants to say no when the money is flowing?  Even central bankers can exhibit human tendencies on occasion, they don't want to be derided for being the Grinch that stole Christmas...  As such it's very hard to know when they will finally start to restrict the lending and tighten liquidity.    While the US is not at the top of this rarified list it is entirely possible our current series of recent (and future?) rate hikes will be enough to tip one of these countries over the edge which could then get the dominos falling.  When is unknown, but that it will happen appears quite likely.


Looks like the Chinese credit impulse may have turned negative recently.  As the data presented above is nearly 6 months old this is very interesting.  While it ripple through to the US markets? We shall see shortly.