Which Virus Will Take Down the Global Economy: COVID-19 or Global Debt? Is Wallstreet more scared of Covid 19 or the global debt contagion?

Which Virus Will Take Down the Global Economy: COVID-19 or Global Debt?

Is Wallstreet more scared of Covid 19 or the global debt contagion? 

On September 25th, 2018, I wrote an article on the global communities' gradual transition away from the US Dollar as the world reserve currency. A significant catalyst for this move was the massive US debt bubble, not only in their sovereign debt but also in their corporate debt bubble. https://billionairechronicle.com/us-interest-rate-rise-to-highest-since-2008/

I believe the corporate debt bubble will be the “Black Swan” event that could take down the economy in 2020. 

As the global community worries about the worldwide distribution of commerce caused by the Corona Virus or COVID-19 (as it has now been renamed). I believe the coronavirus could be the Black Swan that could be the catalyst that ignites several other black swans that are waiting in the wings and, in particular, the global Corporate Derivative bubble.

What is a Black Swan event? A Black Swan is an event that no one saw coming or predicted that leads to a significant economic downturn. 

My good friend and Certified Financial Planner, Tim Picciott, coined the term MAGA stocks – a term that has since been tweeted by President Trump. The MAGA stocks are Microsoft, Amazon, Google and Apple. These stocks recently hit about 27.53% of the total SP500 Market cap, an insane overvaluation in my point of view. Before the February crash, MAGA stocks accounted for 65% of total SP500 gain in 2019. There certainly is more potential return to gain from the last crack-up boom in the SP500, as the Price Earnings ratio currently sits around 24.25, nowhere near the 2008 craze of 70.91.

It is trading northwards, so I would recommend treading cautiously. The current stock market rally has been pushed up by very poor fundamentals. The debt is taken on by corporations stopping the production of real goods but instead are buying back their company's shares. It creates a false economy, absence of supply, demand and new product research. Case in point, Boeing currently produces airplanes that cannot fly. Meanwhile, they buy back their shares to prop up their share price. In 2019 over $400B share buybacks were done by major corporations like Apple, Wells Fargo, Mastercard, Intel, Lockheed Martin and Microsoft, to name a few. 

Corporations have loaded up on debt. Is this debt sustainable, or have US corporations been forced into becoming zombies? A zombie corporation is a corporation that cannot pay down the principal on their debt. They survive by paying interest rates only on their debt. Currently, 13% of all worldwide corporations are zombies. As of July 2018, the SP1500, which has 90% of US corporations, seen 15% of their corporations are zombies.

The real economy is "debt," sorry I meant dead. Who is buying this debt? In Europe, the ECB has bought €2.84T in corporate debt. A lot of it is negative-yielding. The insanity of negative-yielding debt is crazy as it gives you less money back when the investment term is over. 

Back to the US, in 2018, the percentage of debt issued that was investment grade, meaning investable by pension funds and sovereign wealth funds, was 21.41%. That's almost 1/5 of the total debt. To me, this is insane and a visible bubble. The rating agencies lied to us leading up to 2008. Do we think things have changed? The rating agency's stock has skyrocketed over the last five years. It is clear evidence that we are heading towards a massive debt crisis. 

Why am I saying this? Because I see a correlation between the higher rating agency share price and the issuance of AAA-rated Collateralized Loan Obligations. Below is a chart that shows how the CDO's Collateralized Debt Obligations that collapsed the world in 2008 and the current size difference - which is six times higher. 

What is a Collateralized Loan Obligation on a fundamental level? CLOs or CDOs start with underlaying debt issued by corporations and or private personal liability. The two are the same in today's world as a corporation is legally looked upon like a person.

Using the corporation's debt, the banks or CLO issuers took these loans, put them into another corporation called either Special Purpose Vehicle or Special Purpose Entities. Banks call them SPEs and SPVs. After this, these SPEs and SPVs are created. They get moved into structures called CLOs in tranches based upon the rating of their underlying debt. The problem in 2008 was that small amounts of AAA-rated debt gave way for 80-95% of lower-rated debt in the CDO's. The stamp of approval from the rating agency of AAA, making them available for pension and SWF investments. In 2008 the underlying debt payments failed to come through, and the debt defaulted, and the payments from these derivatives called CDO's dried up, and they collapsed. 

Banks were fine as they ended up with the assets, and they made money on the creation of the derivatives. 

Since September 17, 2019, the banking system has been bailed out by a credit line by the Federal Reserve in the US. On September 17, the overnight lending rates called, REPO rate jumped from 2% to 10%, which froze the banking system. The overnight lending balances skyrocketed of banks that do not have enough reserves vs the ones who are missing reserves. They lent to each other making sure all the banks and other institutions are solvent when the next day comes. The FED said it was temporary to bail out banks overnight, but they have now extended it to April 2020. In November of 2019, they had to start doing Shadow QE or not QE, as Powell called it. They have now bought over $120B worth of derivatives called Mortgage-Backed Securities and US Treasury Securities. The total Balance sheet has increased by about $500B. 

Why has this sudden move from raising interest rates translated to cuts in the economy? Trump and the FED are telling us that everything is okay. Is it? That brings me to my last point in this article, which is the interest rates. When the central bank cuts rates after raising them, do they historically go down from there? Traditionally when prices drop, they will fall and stay low during a crisis, but where are we now? If the rates drop about the same on average as it has done throughout history, we would have -2.8 to -3.5%. Do you believe this is not possible? It is! I highly suggest you read the book the curse of cash where these policies are discussed. 

The end game is this. We are heading for the collapse of the global fiat system, which will lead to the US losing its controlling power of the world reserve currency. The last five reserve currencies lasted about 100-120 years. We are in the year 116. With each passing year, the alarm bell only intensifies. 

In my opinion, the next financial crisis will be caused by a debt and currency trust crisis. I have personally positioned a considerable portion of my portfolio in Wealth Insurance, Gold, and Silver. In the event of a banking system failure, my insurance is placed in cryptocurrencies.