Having gorged on the fat pipe of cheap credit for much of the previous few decades, the last few years have rapidly and aggressively slapped the US (and indeed much of the world) from its stupor. All that growth, was it real? The speed of economic leveraging began to gain momentum in the early 1970s and accelerated sharply in the 1980s as the cost of debt began its decades-long decline. That leverage enabled consumption and capex to rise quicker and with less capital but obviously with more risk. With the current balance-sheet recession stymieing monetary policy and fiscal policy hardly supportive, it seems the private deleveraging hole will be difficult to fill with public borrowing excess. It seems that credit markets (the ubiquitous source of all that leverage) have again and again sung from a different song-sheet with regard to the way we escape from the inevitable deleveraging we are currently undertaking. Matt King, of Citigroup, provides a thought-provoking (and all-encompassing) slide-deck on the coming decade of deleveraging and how now is time for payback.
Payback Time: The Coming Decade Of Deleveraging
Matt King - Citi Investment Research & Analysis
1. The Bubble In Credit
Post Crisis Recoveries... Temporary Blip, or permanently altered trajectory?
The current recovery in context...Fine in some respects, but something seems broken
A Crisis of Demand? Not just a matter of lowering rates (the balance sheet-recession)
More Borrowing = More Growth? previous growth was founded upon borrowing - was it real?
How Much Have We Borrowed? More debt in more sectors in more countries than ever before
Wealth Effects - spending only possible because of high net worth
Leading To The Growth Triangle - But Don't Look Down!!!
Love Triangle or Pyramid Scheme?
2. Ways Of Deleveraging
Balancing Government's Books - Austerity works if offset by private leveraging
Assessing The Broader Economy...but the private sector is in savings mode too!
Whole Economy Deleveraging - much harder - unless you debase the currrency
The Effect On GDP - without FX, adjustment is extremely painful!
Bring On The Central Banks - But don't expect them to work miracles
3. Investment Implications
Saved, or Doomed? It's all a question of confidence!
Growth - Lower, but above all, more volatile!!
Expectations Management - Optimism is becoming harder to sustain
Real Estate - Deleveraging + Older Populations = Downward Spiral
Equities - The end of the equity culture?
Banks and Bankruptcies - Be wary of multiples on leveraged instruments
Fixed Income - low yields should eventually make for tight spreads...
Credit -...but only once the bankruptcies are out of the way
Structured Credit - Better the devil you know (EFSF anyone?)
And In Conclusion...
Debt Needs To Fall...
Asset Prices Likely To Go With It...
and Fixed Returns Beat Uncertain Ones...
Deleveraging Is More Difficult Than You Think