Debt bombs are everywhere:
Debt bombs are everywhere.
Every asset class is over-leveraged.
This is what happens when central banks globally drop rates to zero while injecting trillions of dollars into the economy for a fixed supply of goods.
Every asset class went bonkers during Covid.
Stocks.
Bonds.
Residential real estate.
Commercial real estate.
Art.
Crypto.
Watches.
Trading cards.
You name it.
Every single asset class.
Why is this an issue?
Because most of these assets were purchased with credit.
Credit that the banks loaned out when rates went to zero.
Every person, company, and country massively increased their leverage because rates were so low.
It means your interest payments on the debt were effectively nil.
Money was free.
However, everything changed with inflation.
Everything.
It’s still beyond me that the US Fed was buying $120 billion in mortgage bonds when inflation was at 7%.
Think about this - they were injecting 120 BILLION DOLLARS OF LIQUIDITY INTO THE ECONOMY WHEN INFLATION WAS AT 7%.
That is insanity.
So what did they do?
They hiked interest rates quickly.
The problem is not just that rates are higher today than they were before.
It’s the speed and velocity with which they did it.
In one year, interest rates went from 0% to 5%.
If you are a homeowner, car owner, business owner, land owner, or anything owner and you purchased assets while rates were at zero, your interest payments skyrocketed.
Those on variable rates saw their interest skyrocket by double or triple what they paid.
But what happens when you get asset prices falling with interest payments rising?
What happens if you see companies downsizing and people losing their jobs?
People can’t afford their interest and they have no income.
Boom.
A recipe for disaster.
The world is slowly waking up to the debt bombs all around us.
Charlie Munger came out this weekend and said the commercial property market is in trouble.
Breaking Points just did a segment on it.
The reason this is such a big issue is contagion effects.
Most commercial properties and loans are owned by small and medium-sized regional banks.
Just like Silicon Valley Bank, First Signature Bank and now First Republic Bank.
All went bankrupt in the last few months.
Half a trillion dollars in bank value has gone poof
We’ve seen a massive drop in bank market caps just this year.
Also with skyrocketing debt.
Look at the charts below.
Student loans.
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Auto loans.
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Credit card loans.
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It will not get better before it gets much worse.
With the bail-in of SVB, the Fed made every bank too big to fail.
Now the Fed is left with brutal choices.
Save the existing financial system while printing to infinity and letting inflation run rampant or watch multiple banks, businesses and countries fail while they keep hiking rates to tame inflation.
I wrote about this problem years ago because I saw the writing on the wall.
Mostly because of what Peruvian Bull wrote.
His Dollar Endgame book is a must-read to understand the situation we’re in.
Everyone needs to buy this and read it.
Regardless, more voices are slowly waking up to where we are.
The Fed dropped rates to zero and injected trillions into the economy.
Everyone levered the fuck up by taking out tons of debt.
The Fed let inflation get away from them and then hiked rates super quickly.
The interest payments on all debts skyrocket.
Asset values have started to fall.
When payments get higher and asset prices start to fall, you have a recipe for disaster.
The issue today is it’s every asset class.
Commercial real estate is over-leveraged.
Residential real estate is over-leveraged.
The stock market is over-leveraged.
Crypto is over-leveraged and crumbling.
This decade will be tough, but this is how history works.
Dalio’s told the world for years and it’s playing out similarly to how it’s been in history.
So what can you do?
Get educated.
Read history.
Read the Changing World Order.
We’re likely headed into an inflationary environment.
Means hard assets like commodities, precious metals and real estate do well.
Also means high-risk growth stocks like tech and biotech do poorly.
Doesn’t mean you won’t have winners in those asset classes, but as a whole, they’re looking at a very tough decade ahead.
It will not be good.
Debt bombs are going off everywhere.
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