This comment discusses the assumptions we have been using in our commentaries over the past 20 years or more.  We have been consistently reminding our viewers that the debt built up over the years has a major bearing on the economic health of the U.S. economy, as well as the economic health of other developed countries, who have also built up significant  debt positions.  It should be clear to investors that are as concerned about the debt how these same countries’ GDP slowed down, just like the U.S. We will also discuss why the plans of the two candidates running for the Presidency of the U.S. will not begin to solve the debt problems that are overwhelming us.

It is clear to us that the increase in debt in the U.S. is responsible for the slowdown in the economy that we discussed for many years.  It was made even clearer when the GDP revisions were reduced sharply downwards this past week.  In fact, the GDP results have been significantly lower in all of the developed countries than virtually all the U.S. economists have been predicting for the past eight years (ever since the “Great Recession”). 

We are glad to have recently seen another individual who is also of the same opinion on the worldwide debt as we are.   His name is Atif Mian and he was interviewed by one of the financial networks recently about this situation.  He is a Princeton University professor and he wrote a book, entitled “Household Debt & Business Cycles Worldwide”.  He showed that whenever Household Debt (H/H Debt) rose sharply, it would be followed by a consumption boom.  But debt financed booms of any kind are not permanent as at some point the debt has to be paid back. This boom would be followed by a reversal in the trade deficit, as imports collapse.  Countries with an H/H Debt cycle more correlated with the global debt buildup would be followed for years with a sharper decline in GDP growth. 

Over the past 11 years we have consistently pointed out that the level of H/H Debt caused the “Great Recession” in the U.S.  We believe the same consequences were also prevalent in virtually every advanced economy that built up their H/H Debt before the “Great Depression”.  It is the result of the fluctuations of aggregate demand as monies are borrowed and spent. But, once that spending dries up, something else is needed to substitute for the missing aggregate demand.  When borrowers can’t or won’t borrow any more the economy slows.  

This is a key cause of the economies’ sub-standard growth since the “Great Recession” of 2008 and 2009.  Since then, the Fed tried to increase demand through monetary policy (with QE 1, 2, and 3 as well as building up their balance sheet from $500 bn to over $4.5 tn.).  The US ZIRP and the European and Japanese NIRP, that were intended to solve everything by stimulating financial assets directly and then have a spillover effect to spending and growth, have only successfully stimulated the former.  People are saving what they can, but growth remains anemic.  While debt remains at near record levels, bond yields are near all-time low levels and stock prices are near all-time highs.  Valuations are also not far from all-time highs.  In the meantime corporations are buying back stock, hand over fist, and in many cases borrowing the money to do it at the expense of long term capital investment.  This is not the formula for a vibrant economy and financial markets.

Countries that have been able to weaken their currencies have been able to handle these shocks more effectively than those that haven’t weakened their respective currencies.  But as we have stated many times in referring to the “Cycle of Deflation” (see attachment), devaluations and competitive devaluations (as countries attempt to export their deflation to other countries) are followed by protectionism and tariffs.  It appears to us that is exactly the mantra of candidates Trump and Clinton.  The Fed and financial press have many times used the term “escape velocity”, referring to an acceleration of growth that would allow the Fed to normalize rates.  So far, unfortunately, “escape velocity” is nowhere to be found.  We believe it will be very difficult to extricate our country from this unprecedented situation.

From our point of view, neither Trump nor Clinton have articulated policies that will solve our debt problems.  Though Trump has payed lip service to the size of the $19 tn public debt the protectionist policies he espouses, we believe, will only slow the economy further and thus decrease tax revenue while at the same time adding to the debt and deficit.  For her part, Clinton has not made any mention of the debt as that would be critical of the third Obama term for which she appears to be running. When viewed from the standpoint of Total Credit Market Debt and GDP growth (see attachment courtesy of Ned Davis Research) it is crystal clear to us that as debt has grown at higher rates than GDP, the economy continues to slow further.  Please note that the Total Credit Market Debt to GDP Ratio, while off its all- time high, is still in the stratosphere.  We believe Trump’s stated tax and trade policies should drive debt up by a staggering number.  Clinton’s giveaways to the middle class (such as free college tuition) and the continuation of the Obama regulatory morass should also make our debt problem even worse.  And keep in mind we have not even addressed unfunded liabilities (Social Security, Medicare, etc.) which are estimated to be between $80 - $200 tn.

In summary, we once again state that we are in the “Central Bank Bubble”.  The Fed got things rolling with ZIRP and the Europeans and Japanese upped the ante with NIRP.  The Chinese, it should be mentioned, do have “normal” interest rates.  That’s the only thing that’s normal for their economy and stock market that are not remotely free.  They too are ultra-extended and sitting on a Mount Everest of debt.  The politicians do not appear to have the answers currently, so in closing we say, “Buyer Beware”!