Risk Overhanging This Market

Although the stock market has been enjoying a sustained period of euphoria, it would be prudent to keep in mind one formidable threat.

That is #DEBT.

There is an enormous debt burden overhanging the economy and the markets.

Bonfires are fun to watch, but they eventually burn out.

Human folly apparently does not, so we just keep adding to the absurdities.

The economy is more leveraged than ever

The chart that is attached is straightforward: It shows outstanding debt as a percentage of GDP. Broadly speaking, this is a measure of how leveraged the U.S. economy is.

It was in a sedate 130%-170% range as the economy industrialized in the late-19th and early-20th centuries. It popped higher in the 1920s and 1930s before settling down again. Then came the 1980s. Credit jumped above 200% of GDP and has never looked back.

It climbed steadily until 2009 and now hovers over 350%.

The Fed’s balance-sheet unwind spells trouble

The Fed and other central banks have practically forced investors into risk assets since 2008. You can see the relationship clearly in this chart. The green segments of the S&P 500’s rise occurred during quantitative-easing programs.

Ample low-cost liquidity drives debt formation and asset prices higher. That’s not controversial. It makes perfect sense that the withdrawal of ample low-cost liquidity would also impact asset prices in the opposite direction.

Read more.