The Party’s Over

Since year 2000 we’ve had a big borrowing party aka financialization. In a nutshell, financialization is when financial ingenuity adds significantly to company profits instead of better products, clever marketing and so on. In 2018 the world growth seems to be slowing. The Financialization Party’s Over.

We had the property booms leading up to 2008 fed by banks re-selling mortgages and lending the money out again. Round and round. Pumping up the housing market ravenously devoured by consumers feeling good about rising prices.

Shares too, raced ahead until September 2007 and again to all-time records in the last decade. Debt to buy stocks is at record levels too.

I’m sure most people know the 2008 ‘cure’ dished out trillions that propped up banks and boosted stock markets assuring benefits went to the already wealthy. Concurrently, globalisation ramped up offshoring to epic proportions eliminating many onshore jobs. Why pay for benefits and rights when the PR department can paper over the offshore poverty wage cracks and there’s so much more profit to be had for shareholders?

History, ain’t it great! Get’s better. Shareholders want better than last time, every time. Drop in buying back shares, i.e. fewer remaining shares are worth the same total ergo individually, each share is worth more. With money so cheap and this quarters numbers the elephant in the room, many companies borrowed to buy their shares.

Looking at major economies like the US, China and the UK and emerging economies like Brazil, Turkey, Argentina and many more we’re seeing major end of party signs for example:

  • record household debt. E.g. USA at $13.3 trillion just as interest start to rise
  • total debt worldwide nearing $250 trillion.
  • property markets rolling over E.g. London, Australia and now some SF Bay Counties showing early signs.
  • Baby boomers going bankrupt in record numbers.

Economies go in cycles just like us: we all need a good night’s sleep after a busy day. After the big prosperity comes the downturn, usually every six or seven years. As a rule of thumb, the more debt the sharper and deeper the downturn is.

With a richly priced stock markets, richly priced property markets and record levels of debt, common sense tells us to tread carefully. Risks are high at the moment so best not to go out on a limb financially speaking.

A Line chart showing RV sales in America from 1980 to 2017 with a peak in 2007. From 2009 sales accelerated to a record in 2017 at $20 billion, 33% higher than the recorded in 2007.
Data from RVIA.org

Recreational Vehicle sales follow economic ups and downs representing financial optimism and ability to pay (or borrow). The chart above shows RV sales in America but, since April 2018, sales have been lower year on year. A canary in the coal mine?

 

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