“The bailouts worked...perfectly.”
I don’t really talk politics with people.
I normally just say something like, “I make Ron Paul look like Joseph Stalin,” listen, and try to find a way to change the subject to something more interesting.
At times like these, the topic is unavoidable though.
So when a few friends brought up the problems with Trump, Clinton, the bailouts, Washington, and how they will lead to economic catastrophe, I didn’t offer anything.
When asked my opinion, I merely mentioned the bailouts worked exactly as intended.
The table was aghast.
Here’s what they didn’t understand, why they will get caught in the next crash, and miss the massive opportunity which inevitably follows.
The Most Important Number In The World Today
As you know, the post-2008 economic “recovery” has been one of the weakest on record.
Any stat you look at -- employment, GDP growth, etc. -- hasn’t done well at all.
There’s a simple reason for that.
The current recovery has been driven almost entirely by debt.
All forms of debt have exploded in the last few years.
Government debt gets the headlines. But students, households, corporations, and financial companies have all been loading up on debt.
Few understand what all this really means. Just that it’s bad.
If you understand why it’s bad and the risks it poses, you can avoid the risks and capitalize on the opportunities it presents.
Let me explain.
Debt is simply borrowed money.
The problem with debt is that it doesn’t really do much for the global economy.
All it does is increase the money supply and cause asset prices to increase.
For example, total global debt levels were $87 trillion in 2000.
By 2007 total debt levels soared to $142 trillion.
That debt expansion basically added an extra $55 trillion of money to the global financial system.
It found its way into all sorts of places.
It pushed up housing, commercial real estate, stock, and asset prices across the board.
As long as the debt levels were expanding, it all “worked.”
Asset prices grew. Everyone got richer.
When the debt started contracting though, it sparked a negative spiral.
Some debt went bad, asset prices declined, more debt went bad, asset prices fell further, and on and on.
It culminated in the credit crisis when the asset values of everything collapsed and tens of trillions of dollars worth of debt went bad.
Then came the bailouts and the Federal Reserve’s “quantitative easing” policies.
Their entire purpose was to reignite another debt bubble...and they worked.
Today total world debt has expanded to $230 trillion.
That’s an expansion of $88 trillion in new money sloshing around the world economy over the last peak in 2007.
The new money has gone everywhere as well.
It has pushed up asset prices of stocks, real estate, exotic cars, and every other asset class out there.
Everyone’s getting richer on paper just like they did between 2000 and 2007 and it too will end eventually.
Given the size of the debt bubble (about 61% bigger than 2007), it will be worse than 2008.
The question is when will it all implode.
However, the presidential election is likely not the catalyst for the next debt meltdown.
This will be the real catalyst for it all to end.
How To Know The End Is Near
The benchmark for the world’s debt market is interest rate on the 10-year U.S. Treasury Bond.
This single number is really the most important number to the global financial system.
Corporate borrowing rates are tied to it. Junk bond rates are tied to it. Mortgage rates are tied to it.
When it goes down, debt levels tend to expand.
After all, interest rates are the price of borrowing money.
So lower prices mean borrowing is cheaper and therefore there’s more borrowing.
That’s what happened between 2000 and 2007 when global debt increased $55 trillion.
It’s also what happened between 2009 and today when global debt increased by $90 trillion.
And it’s why the recent turnaround in the interest rate on the 10-year U.S. Treasury is so worrying.
In the last four months the interest rate on the 10-year U.S. Treasury has spiked from 1.34% to 1.75% as I wrote.
If that trend holds on for another six months or a year and interest rates go back up to 3% or more, the current debt bomb will implode.
If it does reach that level, you’re going to be on the sidelines with plenty of cash.
Because when it’s all over, asset prices will collapse again, and you’re going to be able to buy back in again just like in 2008 and 2009.
Now, I’m not saying the world is going to crash in the next month or the next year.
There’s no way to know precisely when.
However, if you’re watching the 10-year U.S. Treasury rate, you’ll have a far better idea when it all will all unravel than just speculating the presidential election will lead to a market crash.