This past week, legendary billionaire investor and international business deal financier Paul Tudor Jones warned the world that it has taken on far too high an amount of debt. He predicts that this will cause problems for all asset classes and markets in the not too distant future.
Jones has a painfully obvious point for those who take off their rose colored glasses. Total debt in the world notched a scary new all-time high amounting to $247 trillion per the Institute of International Finance (the IIF). Economists are starting to wake up to the increasing danger of out of control debt on a worldwide scale. It now poses a very real threat to the international growth story (and financial stability in general).
Paul Tudor Jones warned starkly:
“From a 50,000 feet viewpoint, we’re probably in a global debt bubble. Global debt to GDP is at an all-time high. This is going to be a very challenging time for policymakers going forward.”
If you wonder about Jones’ credibility in making these kinds of big macro economic forecasts, he gained notoriety in 1987 for correctly predicting the Black Monday crash. His followers are legion. Tudor Investment his hedge fund counts $7 billion in assets under management.
Jones is confident that the proverbial ax will fall on the corporate bond market first. He is not alone in this assessment either. S&P Global shared information in 2018 revealing that the American corporate debt market reached a record high at $6.3 trillion, as this chart below shows:
Not coincidentally, this was around the time when worldwide total debt topped its prior highs to touch $247 trillion. Jones dramatically warned:
“I think this time it’s going to be corporate credit and I think the breakdowns are something that we have to pay attention to in the last day or two. And they’re really scary because, one thing about this credit bubble [is] we have had liquidity absolutely dry up in so many markets. There probably will be some scary moments with corporate credit. Zero rates and negative rates encourage excess lending. That is of course why we’re in such a perilous time.”
Jones and company believe that the stocks stand overvalued in the 70th percentile. They anticipate a mounting tidal wave of overly debt-ridden firms up against serious restructuring crises in this point in the economic cycle thanks to rising interest rates.
The Fed may have held off on another interest rate increase when they met earlier this month, yet Fed observers anticipate that they will go higher with rates once again for the December final meeting of 2018. As some economists have noted, you do not need a significant move higher in interest rates for trouble to start brewing in the markets for high-yield debt.
Analysts like Ken Moelis have held up today’s default rate in the sector of high-yielding bonds in urgent warning. Right now approximately only two percent of this paper defaults. That rate stood at a more frightening 10 percent in the height of the Global Financial Crisis. There is a vast amount of distance from two percent to ten percent.
Moody’s Investors Service has also released relevant research alluding to the concerns of analysts like Moelis. Earlier in 2018, Moody’s commented on the fact that the corporate debt level verses GDP stood at an all-time high. As they pointed out, in other occasions where such debt to GDP ratios reached close to this high mark, there were serious and painful recessions and scary market crises moments. Moody’s gave the sobering related debt to GDP level examples of 1990, 2001, and 2009.
Is Your Retirement Portfolio Prepared for the Coming Debt Crisis?
Each of those three cases saw the corporate debt default rates soar first to and then beyond 10 percent. They ultimately reached 10.1 percent, 10.5 percent, and 11.1 percent respectively. Moody’s has also forecast there will be an especially big wave of defaults in junk bonds occurring this coming year and the following years. Gold boasts a one of a kind safe haven track record that other asset classes can only dream of nowadays. For literally thousands of years, individuals and investors alike have sought out gold to save the value of their money and assets in unsettling times of geopolitical collapse and economic catastrophe alike.
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