March 21, 2015

Heavy Burden Weighs on Markets

Market Update, Stock Market

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New York Post Business By John Aidan Byrne

March 21, 2015 | 11:39pm

The grand experiment of central banks to borrow their way to growth may be headed for implosion.

The record expansion in debt across the globe — a stunning $57 trillion since 2007, when the financial crisis erupted — is shattering market confidence and choking prosperity at home as the Fed threatens higher interest rates and Europe engages in its own round of quantitative easing, according to many Wall Street analysts.

“The debts grow larger and larger because of our ability to postpone the consequences — and we are rapidly approaching the crisis that will dwarf the crisis in 2007 and 2008,” said market pundit Peter Schiff, CEO at Euro Pacific Capital.

“The only way we are able to stay ahead is by reducing interest rates and by having the Federal Reserve monetize debt,” he added

And with talk of raising rates at the Fed, the losers are already piling up.

Big institutional investors were licking their wounds earlier this month. Government bond yields plunged to all-time lows in the eurozone — dampening returns — after the European Central Bank began buying government debt and other bonds. It did so in a US-style $60 billion monthly quantitative easing program aimed at inflating Europe’s struggling economies.

The US debt markets are not doing much better. US Treasury yields have trended lower as investors vainly chase them for better returns. Corporate debt markets are also being battered by a rash of bad economic indicators — such as retail sales falling the last three months — showing that the astronomical debt burden has produced little economic growth.

The S&P 500 index posted its largest loss in two months, losing 34.91 points, or 1.7 percent, during the second week of March only to rebound last week when the Fed seemed to push back the date on raising rates.

“Those holding five-to-seven-year maturity corporate or municipal bonds will rule the day,” warned Russ Zalatimo, managing partner at HudsonPoint Capital, explaining how longer-term bonds usually lose more in value than shorter-term notes as rates rise. “The longer the maturity, the deeper the drop. We’ll see the revenge of the short-duration bond. No one should be caught by surprise should rates rise.”

The bogeyman is unsustainable debt, say analysts. The globe is overwhelmed with a ticking time bomb of debt. Total US debt — including household, non-financial corporate and government debt — is off the charts, surging from $31.9 trillion in 2007 to $40 trillion last year, from 217 percent to 233 percent of US gross domestic product, according to McKinsey Global Institute.

Overall debt worldwide was $199 trillion in 2014, 286 percent of global GDP. In 2007, this total debt was $142 trillion, 269 percent of GDP, according to McKinsey.

“It is impossible to stay ahead because there is no way GDP can ever grow as fast as the debt is growing,” Schiff said.

But that approach (rather than natural market forces including more savings and capital investments) is a toxic solution, argues Schiff, who unlike many pundits is skeptical of coming rate hikes.

He thinks it would tip the US into the deep recession Washington is trying to avoid at all costs.

As the debt mountain expands, the threat of rising rates will hit various sectors especially hard, from homeowners on adjustable rates to credit-card holders, financial planners note.

“All the while the problems get bigger,” added Schiff.

GDP, meanwhile, is now looking more wobbly. The Atlanta Fed on Thursday cut its first-quarter estimate for GDP in half, to 0.3 percent.

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