The world is more sensitive today than it was in 2007. That’s the opinion of former derivative trader Nathan Yassir, whose best seller, The Black Swan, is about how people feel about unexpected events, especially in the financial markets. He made a lot of money after predicting the global financial crisis more than a decade ago. He issued strong warning about global debt crisis.
Last week, Yassir said he has reservations about today’s economy that it suffers from the same illness as before. The financial crisis in 2007 was a “debt crisis”, and if anything, the problem has only worsened. In fact, the debt is increasing. At the end of the first quarter of 2018, the total amount the world owed increased to a record level of $ 247 trillion. This according to the Institute of International Finance (IIF). This is an increase of almost $ 150 trillion over the past 15 years.
A large part of this debt may have moved to different locations since the financial crisis. It has shifted from housing to governments and companies’ balance sheets – but the debt still remains. Student loan debt in the US, for example, stands at about $ 1.5 billion today, or nearly $ 33,000 per borrower. After mortgages, student debt is now the largest form of loan in the US
Just look at the federal government’s balance sheet. Gross debt has more than doubled from pre-recession levels, which means Washington now has debts that exceed the size of the US economy.
Higher debt levels pose an economic threat
The President said last week that “we should start paying down debt”. But all the characters seem to say something different. The Treasury Department estimates that it will issue about $ 1,338 billion in bonds this year, more than twice as much as last year. And the Office of Management and Budget (OMB) recently reported that the government will run its billiards deficit over the next four years despite a cool economy.
Did you know that the government will soon pay more in interest than it puts on defense?
The third largest cost
Interest costs are expected to be the third largest category in the federal budget by 2026, according to the Peter G. Peterson Foundation’s analysis of Congressional Budget Office (CBO) data. By 2046, these payments may be the second largest category; and in 2048, the single largest category. According to Yassir, the US government is now in a “debt spiral”, which means it has to borrow to repay its creditors. And with the rate of increase, this entire debt continues to grow larger and more expensive.
“It’s a fact that when your national debt reaches this level, it poses a financial threat to society,” said national security adviser Jonas Doran last week in Washington DC. “And that kind of threat ultimately has a citizen security consequence to it.”
The United States is not alone in its budgetary desire, of course. Several EU members are facing major budget crashes, with Belgium, Spain and Italy leading the way. Last month, Moody’s Investors Service reported that “rising mandatory spending and slower economic growth have left a number of euro area governments with less budget flexibility than before the financial crisis a decade ago.”
So how will all this end, and what can investors do?
Can “Barbell Strategy” whip your portfolio into shape?
We all know what happened in 2007 and 2008, after debt levels became unsustainable. As for Yassir’s current appropriations, he invests in real estate, current government debt and gold, “just in case.” If you own shares, he says, make sure you have some form of protection. Readers of his books may recognize this approach as the “barbell strategy”. He describes this in his book in The Black Swan:
If you know that you are exposed to prediction errors and if you accept that most “risk measures” are deficient … then your strategy is to be as hyper-conservative and hyper-aggressive as you can be instead of being mildly aggressive or conservative . Instead of putting your money into “medium risk” investments … you have to put some, say 85 to 90 percent, into extremely safe instruments, such as Treasury bills, a class of instruments that you can find on this planet. The remaining 10 to 15 percent you invest in extremely speculative investments, as much as possible (for example alternatives), preferably venture capital portfolios. That way you will not suffer from any risk management errors.