Divergent Levels of Debt: Differing National Strategies and Their Consequences for Investors Erik Norland, Senior Economist & Executive Director Intelligence & Analytics November 2018 1
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World Economy on the 10 th Anniversary of the Crisis The global economy has been enjoying its first synchronized expansion since the middle of the last decade, but how much longer will it last? U.S.: America appears to be in the late stages of an economic expansion and budget deficits are set to explode under the strain of lower tax revenues and soaring domestic and military spending. Flattening U.S. yield curves could produce a sharp rise in volatility. China and Commodities: China has a massive debt burden and a flat yield curve. Its economy may be in the early stages of a slowdown that could drag commodity prices lower and send emerging market currencies plunging. The key will be how China deals with its debt issues. Europe: It s hard not to be optimistic. With rates at zero, the economy appears to be recovering nicely and the pending end of QE poses little threat to growth. Brexit: The U.K. negotiations with Europe are not going well and this poses problems for the U.K. but not for most of the rest of Europe. The trade war will hurt all countries involved, could lead to higher inflation and slower global growth while exacerbating problems in China and the US 4
Trade War + Debt is a Toxic Combination for China 5
Eurozone debt is a simple story only on the surface 6
Three Eurozone Countries are Rapidly Deleveraging 7
Three Eurozone Countries are Levering Up 8
Two Eurozone Countries Have Below Average Debt 9
Everyone else has average or above average debt 10
Where the debt is issued is also important 11
US Rates Still High by International Standards 12
Fed concerned by potential for rising inflation 13
Fed worries that unemployment is below u* 14
Fiscal Divergence 15
US Budget Deficits Normally Shrink in Expansions 16
US Budget Deficits Normally Shrink in Expansions 17
Dollar Caught in a Monetary vs Fiscal Policy Tug of War 18
Long-Term US Rates Largely Unmoved by Fed 19
Fed says 1 more hike in 2018, 3 in 2019, 1 in 2020! 20
Why does nobody seem to care about risk? 21
Why does nobody seem to care about risk? 22
This Chart Explains Where Things Are Heading 23
The Monetary Policy Volatility Cycle Explained 24
The Monetary Policy Volatility Cycle Explained 25
The Monetary Policy Volatility Cycle Explained 26
The Monetary Policy Volatility Cycle Explained 27
The Monetary Policy Volatility Cycle Explained 28
The Monetary Policy Volatility Cycle Explained 29
The Monetary Policy Volatility Cycle Explained 30
Unemployment Yield Curve Cycle 31
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