Today the world debt is US$217 trillion – and we should all be preparing for what that means.
10 years after the end of the great recession, the world is still a volatile place for investors. We have seen asset values continue to rise on the back of historically low interest rates.
We now seem to have asset bubbles in property, and in world share markets. This is on the back of the world reserve banks printing money. If money is cheap to borrow, it is only prudent for businesses and individuals to borrow and buy assets. As the money supply has expanded and invested, then we’ve seen asset prices around the world grow.
To make things worse, the historically low interest rates have created “zombie companies”. These are companies only being kept alive by the low interest rates. In the US, 10% of the businesses are classified as zombies. If we see a 2% increase in interest rates, these companies will be killed off.
The impact of low interest rates doesn’t just impact on the share market, but it also impacts on the bond market. Since the global financial crisis, global credit has boomed. In the US, 49% of the corporate credit is BBB. This US $5 trillion is one step away from junk bond status. If a down grade comes, these company bonds will be sold off in the millions. To make things even more complex, US $0.5 trillion of this debt is due to mature in the next three and a half years. This has serious implications to us all as every recession is preceded by a bond crash. This is where interest rates increase and bond values fall.
New Zealand might be at the end of the world, but our financial stability is fragile. As a country we are tiny, and if the US economy sneezes, our economy will need to head to intensive care.
In 2001 we had the DOTCOM bubble and I remember reading about it the day after most of the news hit. In 2007 we read the news on the internet, but next time we are going to be reading the news at real time on our phones.
With three million people invested in KiwiSaver schemes, and most of them not taking advice, when the bubble pops, it is going to be an interesting time.
So here’s me shouting from the roof-tops:
GET SOME ADVICE TODAY!
Honestly guys – this is important. For your financial future (and your family’s) be well prepared for whatever is coming up. Give me a call today to make sure you have your KiwiSaver scheme set up optimally – it’s really not that painful, I promise you!
John Barber
WealthDesign – a life well planned