4/3/2019 $3.

3 Trillion of Global Debt Starts to Tip the Scale - Bloomberg

Markets

$3.3 Trillion of Global Debt Starts to Tip the

Scale
Bloated borrowing leads financial commentary. Also, pessimism about stocks and spiking Bitcoin
fever.

By Robert Burgess
April 2, 2019, 3:31 PM CDT

Debt is weighing on the global economy. Photographer: William Vanderson/Fox Photos/Getty Images

Of all the reasons given for the slowdown in the global economy, it seems that the world’s
ballooning debt load has fallen to near the bottom of the list for some reason. Perhaps it’s
because interest rates haven’t shot higher as many expected, but large amounts of debt have
other negative implications that may now be coming to light.

In 2012, Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff wrote in a paper published on
the National Bureau of Economic Research’s website that economies with high debt potentially
face “massive” losses of output lasting more than a decade, even if interest rates remain low.
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Could that be happening now? A U.S. Commerce Department report showed on Tuesday that the
three-month annualized rate of change in new orders for nondefense capital goods excluding
aircraft — a series that provides insight into capital spending without undue volatility from
aircraft orders — declined for the fourth consecutive month. At the same time, the Institute of
International Finance issued a report saying that the mountain of global debt expanded by $3.3
trillion last year to $243 trillion, or more than three times worldwide gross domestic product.
Total debt in the U.S. grew by $2.9 trillion to more than $68 trillion in the largest annual increase
since 2007. What’s truly disturbing is that the IIF said U.S. nonfinancial corporate debt stands at
73 percent of GDP, close to its pre-crisis peak. That helps explain why the first quarter ushered in
the most credit ratings downgrades for U.S. companies relative to upgrades since the beginning
of 2016, according to S&P Global Ratings data compiled by Bloomberg.

Suddenly Struggling
Bonds have had a huge run since the financial crisis but show signs of tiring
Bloomberg Barclays Global Aggregate Bond Index

500

450

400

350

300
Apr 2019
2007

Source: Bloomberg

As such, it’s not a stretch to think that companies are deciding it’s finally time to tighten their
belts and get their debt under control, especially if the economy is possibly headed into a
recession. “U.S. corporate debt relative to GDP reaching record levels is likely to hold corporate
investment back, suggesting the economy will not develop sufficiently strong productivity gains
to compensate for rising input costs such as wages,” the strategists at Morgan Stanley wrote in a
research note.

THE BEST IS NOT YET TO COME

Despite the S&P 500 Index having soared 13.1 percent in the first three months of 2018, its best
quarterly performance since 2009, those who are paid large sums to figure out where stocks go
next are hesitant to get all bulled up. The median estimate of 24 strategists surveyed by
Bloomberg is for the S&P 500 to gain only an additional 4 percent by the end of the year, rising
to 2,950 from about 2,834 on Friday. That price target isn’t much different from the 2,913
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median estimate back in early January. Count BlackRock as one firm that feels the easy money
has been made in risk assets such as equities. “We see a repeat as unlikely and a narrower path
for a grind higher,” Richard Turnhill, the firm’s global chief investment strategist, wrote in a
research report. “The global economy must remain strong enough to quell recession fears but
weak enough to keep policy makers on hold” to keep the rally in risk assets going. That’s a tough
needle to thread. In reality, it’s been a relatively tough market for stocks the last 15 months.
Consider that even with the big gains last quarter, at 2,867.24 on Tuesday the S&P 500 is still
below its closing high of 2,872.87 in January 2018, let alone the record of 2,930.75 in September.
And the only reason stocks are as high as they are is because of the tech sector, according to
Eddy Elfenbein, a money manager who writes the Crossing Wall Street blog. “Many sectors and
individual stocks never made new highs, and they’re still well below their January 2018 peak,”
Elfenbein wrote. “For example, the S&P 500 Value Index never made a new high. It’s currently 6
percent below its peak from 14 months ago. The S&P 500 High Beta Index also never made a new
high. The Consumer Staples sector is way down from its peak. The S&P 500 Industrials also
never made a new high.”

Going Nowhere Fast

Stocks have jumped around quite a bit but are essentially flat since January 2018
S&P 500 Index

3,000

2,800

2,600

2,400

2,200
Jan Apr Jul Oct Jan Apr
2018 2019

Source: Bloomberg

CRYPTOS SHOW SIGNS OF LIFE

Those who believe that cryptocurrencies will someday take over the global financial system have
been pretty quiet for the last year as prices collapsed. But they were out in full force on Tuesday
as the market suddenly spiked. The Bloomberg Galaxy Crypto Index soared as much as 15
percent to its highest level since November. Crypto poster child Bitcoin jumped as much as 23
percent in its biggest gain in more than five years, rising above $5,000 at one point (which is still
a long way from the $20,000 or so it reached during the frenzy of late 2017). As if on cue, crypto
promoters were predicting even more gains, with one saying Bitcoin will surely reach $7,000 in
short order. The thing is, though, nobody really knows what’s behind the sudden move. And if

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you don’t know what’s behind a move, how can you accurately predict anything? The strategists
at Richardson GMP had a nice roundup of all the reasons given for the sudden surge: 1) A short
covering/squeeze that was triggered when Bitcoin recently moved above $4,000; 2) A blockchain
conference in Seoul; 3) An exchange of pounds for Bitcoin by British citizens in case Brexit goes
horribly wrong; and 4) An April Fools’ Day story on an obscure crypto website claiming the U.S.
Securities and Exchange Commission approved Bitcoin exchange-traded funds.

Mysterious Rally
Bitcoin leads cryptocurrencies on a huge rally, but nobody knows why

Bloomberg Galaxy Crypto Index Bitcoin price in dollars

500 7,000

400 6,000

300 5,000

200 4,000

100 3,000
Oct Jan Apr Oct Jan Apr
2018 2019 2018 2019
Source: Bloomberg

THE TREND ISN’T EM’S FRIEND

No matter how you measure it, the first quarter was great for emerging-market assets. The MSCI
EM Index of equities jumped 9.56 percent for its best showing since the first three months of
2017, while a sister index tracking their currencies gained 1.62 percent. The Bloomberg Barclays
EM Hard Currency Aggregate bond index soared 4.93 percent for its best performance since
2012. But rather than doubling down, international investors seem to be losing interest in EM.
The IIF says nonresident flows into EM financial assets declined in each of the first three months
of the year, from $52.6 billion in January to $31.2 billion in February and $25.1 billion in March.
“The most profound dovish shift from the Fed since 2016 and more constructive trade talks
between China and the U.S. were positive catalysts,” the IIF wrote in a report. “We believe weak
capital flows to EM reflect the positioning overhang we have been writing about recently.” In
other words, investors loaded up on EM assets as they tumbled last year, betting that the slide
was overdone. That left them overexposed, and the declining trend line in flows reflects a
rebalancing. As such, it looks as if EM stocks and bonds may be in for a tough slog until that
“positioning overhang” gets resolved.

Running Out of Steam

Returns on emerging-market stocks and currencies slow after banner January

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MSCI EM Index MSCI EM Currency Index

11%
10
9
8
7
6
5
4
3
2
1
0
-1
-2
Dec 31 Jan 15 Feb 1 Feb 15 Mar 1 Mar 15 Apr 2
2018 2019

Source: Bloomberg

DIAMONDS ARE BEING MARKED DOWN 

Given the tremendous growth in ETFs, it’s hard to come up with an asset that isn’t covered by
the market. That makes diamonds conspicuous by their absence. There was the PureFunds ISE
Diamond/Gemstone ETF, but it folded in January 2014 after only about 14 months. But now, the
U.K.’s financial regulator added a small diamond pricing firm to its roster of companies managing
market benchmarks, according to Bloomberg News’s Thomas Biesheuvel. The move will allow
financial institutions to offer products such as ETFs that reference its pricing. But despite a
generally solid economy the past few years, diamonds have been a horrible investment. The
average price for a top 25 quality, 1 carat diamond with a clarity between internally flawless with
no inclusions or marks on the surface to very slight inclusions has dropped 45 percent since
2011, according to the Rapaport Diamond Trade Index. Much of the decline can be pegged to
oversupply, but Panmure Gordon Ltd. figures that may be about to change. Biesheuvel reports
that the firm estimates that there may be a deficit of 15 million carats, or about 10 percent of the
global supply, in 2021.

Not So Precious Gems

Diamond prices have steadily declined in recent years amid a flood of supply

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Rapaport Diamond Trade Index

9,000

8,000

7,000

6,000
Apr 2019
2014

Source: Bloomberg

TEA LEAVES
The Institute for Supply Management’s manufacturing report Monday showed that part of the
economy seems to be doing just fine despite all the talk of an economic slowdown. On
Wednesday, we’ll find out whether consumers are doing just as well. The median forecast of
economists surveyed by Bloomberg is for ISM to say that its monthly non-manufacturing index
came in at 58 for March. While that would be down slightly from 59.7 in February, it’s still lofty
territory. The measure is a diffusion index, meaning readings above 50 denote expansion and
those below 50 signal contraction. To be sure, these are surveys and the results can differ
significantly from “hard data” that record what companies and consumers are truly doing, not
what they say they are doing.

DON’T MISS
The Fed Might Still Blunder Into a Recession: Tim Duy
Bond Market Hops Aboard Carousel of Progress: Brian Chappatta
For Emerging Markets, a Stronger China Is No Blessing: Shuli Ren
Beware the Buyer’s Strike in Corporate Bonds: Marcus Ashworth
Utility Investors Set Themselves Up for a Shock: Stephen Gandel

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:

Robert Burgess at bburgess@bloomberg.net

To contact the editor responsible for this story:

Daniel Niemi at dniemi1@bloomberg.net

Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of
financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit
markets during the global financial crisis.
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In this article
SPX
S&P 500
2,867.24 USD +0.05 +0.00%

BGCI
BBG Galaxy Crypto Index
324.10 USD +41.12 +14.53%

MS
MORGAN STANLEY
43.70 USD +0.17 +0.39%

BLK
BLACKROCK INC
436.45 USD -1.94 -0.44%

ZIG
ISE Diamond/Gemstone
USD +null +null%

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