We are a little cautious

  • Déjà vu
  • A bond aggregator
  • I got nothing

In 2016, global debt hit a new record.

According to the Institute of International Finance (IIF), taking into account global debt from all sectors of the economy — that is, government, household and financial — in the last decade debt rose US$70 trillion. It is now a whopping US$215 trillion. That’s 325% of global GDP.

Let me spell it out for you: US$215,000,000,000,000.

That is a lot of zeros.

Developed markets are still the major contributors, owning US$160 trillion of the debt — or 390% of developed markets’ GDP.

Yet the biggest percentage increase on debt was on the emerging markets share.

The emerging markets hold the remaining US$56 trillion in debt, and in the last decade, they increased their debt by US$40 trillion. Compare that to the US$9 trillion in the decade before.

How are investors reacting to record global debt?

Well, according to Elliott Wave International, they are more confident than ever.

Since 1987, Elliott Wave has asked thousands of households the following question: Do you believe the stock market will be higher in 12 months?

Recently the answer they got surprised them. 47.4% of households believe the market will be higher in a year, that is, almost 1 in 2.

You can check their survey results below. Consumer confidence has spiked from 30% to 47.4% in the last few months.

chart image

Source: Elliott Wave International
Click to enlarge

The only other time investors were so confident was in January 2000…just before the dotcom bubble. Confidence was also running high between 2004 and 2007, just before the global financial crisis hit in 2008. Hmmm.

Seems that investors are most confident at all the wrong times…


Over the weekend, the Dow Jones Industrial Average fell 6.85 points, or 0.03%.

The S&P 500 fell 1.95 points, for a 0.08% drop.

In Europe, the Euro Stoxx 50 gained 6.23 points, or 0.18%. Meanwhile, the FTSE 100 gained 0.63%, and Germany’s DAX index dropped 0.05%.

In Asian markets, Japan’s Nikkei 225 is up 144.56 points, or 0.77%. China’s CSI 300 is down 0.09%.

In Australia, the S&P/ASX 200 is up 44.13 points, or 0.75%.

On the commodities markets, West Texas Intermediate crude oil is US$52.49 per barrel. Brent crude is US$55.47 per barrel.

Gold is trading for US$1,254.44 (AU$1,674.48) per troy ounce. Silver is US$17.97 (AU$23.93) per troy ounce.

The Aussie dollar is worth 74.91 US cents.

Déjà vu

Investors may be very confident on the stock market, but they are starting to lose faith in the housing market.

Since 1974, the Melbourne Institute of Applied Economic and Social Research has been surveying consumers on the wisest place to store savings. Up to September 2015, almost 30% of consumers thought real estate was the smartest place to put your money.

Well, not anymore.

This is from the Sydney Morning Herald:

Confidence in the housing market has collapsed, with the number of Australians describing property as the wisest place to put their savings falling to its lowest level in more than 40 years.

So where are consumers thinking it is the wisest place to put their savings?

Debt. That is, debt repayment.

The graph below showing the survey results since 2000 has some interesting insights.

chart image

Source: Sydney Morning Herald
Click to enlarge

Debt repayment and confidence in investing in real estate are almost opposite mirror images throughout the graph. Since 2015, the two sides have switched around.

The fact is that consumers are becoming more risk averse. They are not so sure anymore that real estate prices will be increasing at the same rate they have been in the past.

When did we see the same low level of consumer confidence in real estate?

The 2008 global financial crisis during the subprime crisis in the United States, when prices and negative equity took a fall. Real estate confidence now is even lower than then.  

The thing is, the Australian Securities and Investment Commission (ASIC) is cracking down on lending.

From The Australian Financial Review:

A mortgage lending crackdown could cut in half the amount a typical household can borrow once higher living expenses and greater interest rate buffers are applied.

A typical couple with an existing mortgage would see borrowing capacity reduced from $450,000 to about $235,000, according to Fitch Ratings, which presented a worked example to clients in 2016.

The analysis was in anticipation of tougher lending standards that would require lenders to assume higher interest rates and living expenses when writing mortgages.

“Borrowers are however making repayments based on the lower actual rates and as rates move higher this will impact overall household expenditure which may result in increased arrears.”

It’s not surprising. Anyone that has friends looking to buy real estate knows that they become pleasantly surprised when they find out how much money the bank will lend them. I know a few who have walked away from buying a property as they do not want to get into so much debt.

That’s not all.

But there are also other concerns. According to a recent report by UBS, 28% of mortgage applications are ‘factually inaccurate’. That is, applicants are either inflating their income or deflating their expenses.

Yet, just as we are starting to see some common sense in consumers and tightening lending conditions — and a very likely decrease in investment in the housing market — the government wants to ‘fix’ the problem.

That is, they are considering removing tax disincentives for retirees to downsize their homes, and allowing first home buyers to access their super to enter the housing market.

Don’t get me wrong, I’m all for allowing people to invest their super as they please. Yet, just as we are starting to see some signs of doubts on the market and a possible cooling, they are rekindling the fire.

A bond aggregator

And it is not just using super. The government is looking to make rents cheaper.

From the Sydney Morning Herald:

The federal government could establish an Affordable Housing Finance Corporation that would use a so-called “bond aggregator” model to kick-start tens of millions of dollars in investment in community and social housing around Australia.

Such a body would complement, not replace, the investment in rental stock by mum and dad investors and help keep housing affordable for people who rent.

A 2016 COAG report on the National Affordable Housing Agreement struck by the Rudd government in 2009, said the number of Australians in rental stress had risen, not fallen, the number of homeless people had risen, and there was no evidence that more Indigenous Australians own their own homes.

Rather than change Australia’s negative gearing tax rules, Mr Morrison will point to the success of the Housing Finance Corporation in Britain, which has provided more than £5 billion ($8.2 billion) in loans for affordable housing.

Therefore, the Australian government “is establishing a taskforce to look at harnessing large-scale private investment through a bond aggregator concept. The bond aggregator would issue bonds to the market, and on-lend these funds to community housing providers – allowing them to access cheaper and longer-term finance.”

That’s right, with more debt.

I got nothing

Meanwhile, on the other side of the Pacific, US President Donald Trump has held a much awaited meeting with Chinese President Xi Jinping in Florida.

If you were expecting Trump style drama, you would have been sorely disappointed.

Things were quite friendly and low key, as both leaders ‘developed a friendship’.

Well, except for the US military striking back at Syria for using chemical weapons right in the middle of the summit. So much for Trump’s promise on US isolationism.

Trump sent a message of strength after the failing debacle surrounding Obamacare, and in the process, ended the honeymoon with Russia.

But back to the meeting with Jinping.

Both sides were full of praise. Trump tweeted:

Tremendous goodwill and friendship was formed, but only time will tell on trade.

So far I have gotten nothing,” Trump joked to reporters at one point. “Absolutely nothing.

Things were kept friendly because they avoided talking about the two contentious issues: North Korea and trade.

Instead, they agreed on 100 days of talking trade.

No mention on tariffs, or of currency manipulation.

Yep, they both came out delivering nothing on trade; they just gained time. And it was a huge success.

Selva Freigedo