Debt Levels 30% Higher Than Pre-Lehman

Global Credit Excess Worse Than Pre-Lehman

The Swiss-based `bank of central banks’ said a hunt for yield was luring investors en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”.

This is happening just as the US Federal Reserve prepares to wind down stimulus and starts to drain dollar liquidity from global markets, an inflexion point that is fraught with danger and could go badly wrong.

“This looks like to me like 2007 all over again, but even worse,” said William White, the BIS’s former chief economist, famous for flagging the wild behaviour in the debt markets before the global storm hit in 2008.

“All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle,” said Mr White, now chairman of the OECD’s Economic Development and Review Committee.

My view:

Once again we appear to be on the edge of a precipice.

Photo courtesy of FutureAtlas

Five years of government coverup of excess leverage in banking and refusal to allow large financial institutions to fail has created a larger bubble then the 2007 one.

The significant difference is we have central banks that are essentially out of ammunition to combat deflationary forces.

It is likely we will see "Abeconomics" go global once the next crisis begins.  A chart of the Yen shows the impact of such a decision.

While the Yen was falling before the assets buying announcement in January 2013, it continued its decline until over 30% of its value was lost.

So we must ask - where does one invest in such an environment?

Staying liquid (in cash) is a zero yield alternative. 

Precious metals are another choice.

Gold and silver miners are still vulnerable to liquidity tightness, so careful assessment of each miner is necessary.

While my view has not changed that gold and silver are headed much higher, some time may elapse before these fruits develop.

With potential currency devaluations looming on the horizon as assets purchasing by Central Banks accelerates, precious metals will remain true to the statement "what you see is what you get".

When liquidity almost completely dries up, and an initial sell off in PMs is possible during this time, it remains my view that the little remaining liquidity will finds its way to the gold and silver miners as demand for reliable alternative currencies explodes.

This may be quite some time in the future.

In the interim, given the current state of the banking system and globalized fiat currencies, the following quote is worth reflecting on:

You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.

Abraham Lincoln, (attributed)
16th president of US (1809 - 1865)