Hey There Income Hunters,
The stark debt picture makes this current inflationary period much harder to deal with than any in the past.
Inflation is tricky, and the masses would rather assume this episode will be similar to the 1940s and 1970s when it was difficult but we were able to get out of it and start over
The problem is, the US government doesn’t have the latitude that it had in the past.
In the 1940s, World War II put the US in the driver’s seat. We manufactured and sold the weapons needed, and were paid in gold.
So, our dollars, backed by gold, became the reserve currency of the world.
In the 1970s, the Fed printed many more dollars than we held in gold, which triggered a currency and inflation crisis that nearly caused a collapse of the financial system.
However, the Fed had the capacity to raise rates to 16% … which crushed the economy and squashed inflation before rates were lowered and growth slowly resumed.
The important point is that the US had very little public or private debt at the time.
That isn’t the case now
Today, I’ll reveal the global systemic risk caused by the enormous debt burden that many countries – including the US – are carrying.
Private Credit-to-GDP Warning Signs
Today, consumer credit is flashing warning signs of systemic risk for many coutries.
Closest to home for the US is Canada, France, Germany and Japan.
Consumers have been taking on more credit risk since the financial crisis of 2008, as rates stayed near zero over most of that time.
An even bigger issue is if the interest payments on the debt are far above the long-term average.
The Bank of International Settlement says payments above 1.8% of the long-term average trigger a 50% chance of systemic risk in three years.
The reason the US is not in either category yet is because of its position as the world’s reserve currency which allows us to borrow money (i.e. issue bonds to all of our trading partners).
In reality, that privilege over the long term was as much a curse as a blessing, and this is important to understand …
You see, as the reserve currency to the world, we had to print massive amounts of dollars and distribute them to our trading partners so they had enough to exchange for oil.
The “petrodollar” system that the US designed after the currency crisis of the 1970s was a deal with OPEC nations that gave them US military protection in exchange for a promise to ONLY accept US dollars for oil.
This tactical move helped the US maintain its global power, but it also made it inevitable that our debt levels would rise to unsustainable levels.
I’ll cover this more in future letters, because the petrodollar system’s demise will be a major signpost for a collapse in the dollar.
Today, Russia, China, India and other emerging economies understand the inevitable decline in US dollar dominance for global trade so they are rapidly making trade deals to exchange local currencies for the Chinese yuan when trading away from the US.
Bring It Home
The information the BIS provides is incredibly useful in seeing which countries are in the most danger and which have the strongest balance sheets.
Check out Canada and France in particular as they are suffering in both categories. That puts their financial markets at the most amount of risk in the short-term.
Yet these developments can provide some excellent “paired trades” in which you can buy the strongest countries against the weakest.
Last week Power Income Trader teamed with Andrew Giovinazzi and closed a long China/ short US trade for a nice two-day profit of 30%.
Paired trades are awesome in bear markets because a long/short position can reduce overall volatility as you wait for the fundamentals to kick in.
This limited-run, small-group series (it will be held bi-weekly through the May 4 Fed meeting) will include selections of the lowest risk/highest reward trades we foresee being profitable over the next few weeks.
Live and TRade With passion My Friend,
Griff