Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

[Session 3] The Global Debt Bubble by Jeffrey Detwiler

55 views

Published on

APAFS 2019
19th PRIC

Day 1 - Session 3
by Jeffrey Detwiler
Garcia Hamilton & Associates, L.P.

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

[Session 3] The Global Debt Bubble by Jeffrey Detwiler

  1. 1. The Global Debt Bubble Awards/rankings may not represent client experiences and are not indicative of future performance. Go to www.garciahamiltonassociates.com/awards/ for additional information on each award. Presented By: Jeffrey D.Detwiler,CFA,AAMS Partner,Portfolio Manager 5 Houston Center 1401 McKinney, Suite 1600 Houston,TX 77010 Tel: (713) 853-2346 Fax: (713) 853-2300 jdetwiler@GarciaHamiltonAssociates.com www.GarciaHamiltonAssociates.com
  2. 2. Analysis of Bond Market Sectors: • U.S. Government Debt • Corporate Debt • International Debt Is there a “Debt Bubble” Right Now? 1
  3. 3. Tulip Mania 2 • Displacement: Tulips are introduced to Holland in the early 1600’s • Boom: Known as status symbols and exotic luxuries, they rise in price and become subject to speculation • Euphoria: Eventually leads to immense tulip overvaluation (1 tulip = 1,000 lb. of cheese) • Distress: One default leads to a general sell-off • Panic: Soon, sellers are everywhere, and buyers are nowhere to be found: tulip prices plunge
  4. 4. • Displacement: Adopted the Euro in 2001 • Boom: Spent 20% of its economy on pensions • Euphoria: Government spending increases • Distress: Inability to collect taxes • Panic: Greece defaulted Case Study: Greece 3
  5. 5. Global Debt Increasing, Yields Decreasing 4 Sources:Bloomberg Barclays
  6. 6. Growing Debt to GDP 5 380 360 340 320 300 280 260 240 220 200 180 160 140 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 380 360 340 320 300 280 260 240 220 200 180 160 140 DEBT*: TOTAL** U.S. CHINA JAPAN EURO AREA %Of GDP %Of GDP * SOURCE:BIS. **PRIVATENONFINANCIALDEBTPLUSPRIVATEDEBT. © BCAResearch2019
  7. 7. Deterioration in Sovereign Credit Ratings 6
  8. 8. Breaking Down U.S. Debt 7
  9. 9. U.S. Debt Securities Percentage of GDP 8
  10. 10. U.S. Federal Debt and Deficit 9
  11. 11. U.S. Federal Debt to GDP Ratio 10 Sources: CBO and OBM Budget Data
  12. 12. Change in Debt Since 2009 11
  13. 13. 47 % Corporate Debt to GDP 12
  14. 14. Historical BBB Debt Outstanding 13
  15. 15. Credit Risk Increasing as Market Grows 14 Sources: Data from Barclays Live
  16. 16. Bond Yields (1980 – Present) 15
  17. 17. Risk vs. Compensation 16 Sources: Data from Barclays Live
  18. 18. Eurozone Debt by Country 17
  19. 19. Eurozone Government Budget Balance 18
  20. 20. Market Value of Negative Yielding Debt 19 Source: Barclays Live Index is Bloomberg Barclays Global Aggregate Negative Yielding Debt Index 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 Feb-10 May-11 Aug-12 Nov-13 Feb-15 May-16 Aug-17 Nov-18 WeightedMaturity(Yrs) MarketValue(Trillions) Mkt Value (Left) Maturity (Right)
  21. 21. EU real curve -50bp for last 18 months 20 French
  22. 22. • Investors should always be cautious of “new era” explanations to justify an elevated asset price after a massive rally • Previous examples include: internet stocks valued on “clicks and eyeballs” and predictions of an impending exhaustion of global petroleum supplies to justify oil prices above $100/barrel • Fundamental justifications for the growing supply of negative yielding bonds being the “new normal” have started to proliferate Negative Yields a “Bubble” or the “New Normal” 21
  23. 23. • Aging demographics • Dwindling supply of global safe assets • “Savings gluts” • “Japanification” of Europe and the U.S. Arguments Underlying the “Negative Normal Thesis” 22
  24. 24. -10 0 10 2012 2014 2016 2018 2020 15 10 5 0 -5 -10 -15 -20 U.S. TRADE-WEIGHTED DOLLAR* (LS, Inverted) WORLD EXPORT PRICES** (RS) Ann% Chg Ann% Chg * SOURCE: FEDERAL RESERVE. ** SOURCE: CPB NETHERLANDS BUREAU FOR ECONOMIC POLICY ANALYSIS. © BCA Research 2019 Dollar Strength Has Impacted Inflation
  25. 25. 4 3 2 2006 2008 2010 2012 2014 2016 2018 2020 4 3 2 US: AVERAGE HOURLY EARNINGS (LS) ATLANTA FED WAGE TRACKER (RS) Ann% Chg Ann% Chg © BCA Research 2019 Wages on the Rise
  26. 26. 3 2 1 2006 2008 2010 2012 2014 2016 2018 2020 2.8 2.4 2.0 1.6 1.2 EURO AREA: WAGES AND SALARIES 5Y/5Y CPI SWAP FORWARD Ann% Chg % © BCA Research 2019 Wage Growth Outpacing Inflation Expectations
  27. 27. 100 50 0 -50 2006 2008 2010 2012 2014 2016 2018 2020 5 4 3 2 1 0 EURO AREA: BRENT CRUDE IN EUR (LS) HEADLINE HICP INFLATION (RS) Ann% Chg Ann% Chg © BCA Research 2019 Oil Prices and Inflation
  28. 28. .4 0 -.4 2012 2013 2014 2015 2016 2017 2018 2019 2020 75 50 25 GLOBAL: LEADING ECONOMIC INDICATOR* (LS) LEI DIFFUSION INDEX** (RS, Advanced by 6 months) * SOURCE: OECD; STANDARDIZED. **BASED ON % OF RISING vs. FALLING DATA SERIES. © BCA Research 2019 Pickup in Global Growth on the Horizon?
  29. 29. 40 20 0 -20 -40 2008 2010 2012 2014 2016 2018 2020 40 20 0 -20 -40 J.P. MORGAN DURATION SURVEY*: NET LONG POSITIONING ALL CLIENTS ACTIVE CLIENTS % % *NET % OF CLIENTS REPORTING LONG TREASURY POSITIONS. © BCA Research 2019 Market Sentiment: A Coiled Spring?
  30. 30. • Decline in bond yields over the past year can be fully explained by the classic drivers – slowing economic growth and soft inflation. • Will bond yields continue to stay at negative (or at least extremely low) levels even after economic growth has stabilized? • If improving economic momentum has little impact on the level of interest rates, then that would be a true “Japanification” scenario. Will Negative Yields Hold? 29
  31. 31. Sources • https://www.nasdaq.com/investing/glossary/e/economic-bubble • http://www.thebubblebubble.com/historic-crashes/ • https://www.investopedia.com/terms/b/bubble.asp • http://www.thebubblebubble.com/tulip-mania/ • https://www.bnnbloomberg.ca/global-debt-of-244-trillion-nears-record-despite-faster-growth-1.1198585 • https://www.usgovernmentspending.com/federal_budget_detail_2018bs12018n#usgs302 • https://en.wikipedia.org/wiki/History_of_United_States_debt_ceiling#Historical_debt_ceiling_levels • https://countryeconomy.com/gdp/usa?year=1975 • https://www.zerohedge.com/news/2017-08-30/19-european-countries-now-have-negative-interest-rates • https://www.usinflationcalculator.com/inflation/historical-inflation-rates/ • https://www.zerohedge.com/news/2019-06-21/gloal-negative-yielding-debt-soars-700-billion-one-day-record-13- trillion • https://live.barcap.com/BC/barcaplive?menuCode=I_BB_BI • https://wolfstreet.com/2019/03/23/countries-with-most-monstrous-corporate-debt-pileup-u-s-wimps-out-in-25th- place-debt-to-gdp/ • https://trends.collegeboard.org/sites/default/files/2018-trends-in-student-aid.pdf • https://www.newyorkfed.org/microeconomics/hhdc.html • https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2019Q1.pdf • https://www.brookings.edu/wp-content/uploads/2015/09/LooneyTextFall15BPEA.pdf • https://trends.collegeboard.org/sites/default/files/2018-trends-in-student-aid.pdf • https://www.bcaresearch.com/reports/view_report/20966/bca • https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-higher- education.htm • https://www.bcaresearch.com/reports/view_report/27501/bca • https://www.nytimes.com/2019/05/30/business/bond-yield-curve-recession.html • https://www.thebalance.com/u-s-debt-to-china-how-much-does-it-own-3306355 30

×