Debt bombs are everywhere

Debt bombs are everywhere:

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Debt bombs are everywhere.

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Every asset class is over-leveraged.

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This is what happens when central banks globally drop rates to zero while injecting trillions of dollars into the economy for a fixed supply of goods.

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Every asset class went bonkers during Covid.

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Stocks.

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Bonds.

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Residential real estate.

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Commercial real estate.

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Art.

Crypto.

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Watches.

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Trading cards.

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You name it.

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Every single asset class.

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Why is this an issue?

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Because most of these assets were purchased with credit.

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Credit that the banks loaned out when rates went to zero.

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Every person, company, and country massively increased their leverage because rates were so low.

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It means your interest payments on the debt were effectively nil.

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Money was free.

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However, everything changed with inflation.

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Everything.

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It’s still beyond me that the US Fed was buying $120 billion in mortgage bonds when inflation was at 7%.

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Think about this - they were injecting 120 BILLION DOLLARS OF LIQUIDITY INTO THE ECONOMY WHEN INFLATION WAS AT 7%.

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That is insanity.

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So what did they do?

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They hiked interest rates quickly.

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The problem is not just that rates are higher today than they were before.

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It’s the speed and velocity with which they did it.

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In one year, interest rates went from 0% to 5%.

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If you are a homeowner, car owner, business owner, land owner, or anything owner and you purchased assets while rates were at zero, your interest payments skyrocketed.

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Those on variable rates saw their interest skyrocket by double or triple what they paid.

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But what happens when you get asset prices falling with interest payments rising?

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What happens if you see companies downsizing and people losing their jobs?

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People can’t afford their interest and they have no income.

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Boom.

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A recipe for disaster.

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The world is slowly waking up to the debt bombs all around us.

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Charlie Munger came out this weekend and said the commercial property market is in trouble.

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Breaking Points just did a segment on it.

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The reason this is such a big issue is contagion effects.

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Most commercial properties and loans are owned by small and medium-sized regional banks.

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Just like Silicon Valley Bank, First Signature Bank and now First Republic Bank.

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All went bankrupt in the last few months.

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Half a trillion dollars in bank value has gone poof 

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We’ve seen a massive drop in bank market caps just this year. 

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Also with skyrocketing debt.

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Look at the charts below.

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Student loans.

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Auto loans.

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Credit card loans. 

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It will not get better before it gets much worse.

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With the bail-in of SVB, the Fed made every bank too big to fail.

Now the Fed is left with brutal choices.

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Save the existing financial system while printing to infinity and letting inflation run rampant or watch multiple banks, businesses and countries fail while they keep hiking rates to tame inflation.

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I wrote about this problem years ago because I saw the writing on the wall.

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Mostly because of what Peruvian Bull wrote.

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His Dollar Endgame book is a must-read to understand the situation we’re in. 

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Everyone needs to buy this and read it.

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Regardless, more voices are slowly waking up to where we are.

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The Fed dropped rates to zero and injected trillions into the economy.

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Everyone levered the fuck up by taking out tons of debt.

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The Fed let inflation get away from them and then hiked rates super quickly.

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The interest payments on all debts skyrocket.

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Asset values have started to fall.

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When payments get higher and asset prices start to fall, you have a recipe for disaster.

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The issue today is it’s every asset class.

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Commercial real estate is over-leveraged.

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Residential real estate is over-leveraged.

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The stock market is over-leveraged.

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Crypto is over-leveraged and crumbling.

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This decade will be tough, but this is how history works.

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Dalio’s told the world for years and it’s playing out similarly to how it’s been in history.

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So what can you do?

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Get educated.

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Read history.

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Read the Changing World Order.

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We’re likely headed into an inflationary environment.

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Means hard assets like commodities, precious metals and real estate do well.

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Also means high-risk growth stocks like tech and biotech do poorly.

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Doesn’t mean you won’t have winners in those asset classes, but as a whole, they’re looking at a very tough decade ahead.

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It will not be good.

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Debt bombs are going off everywhere.

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