Market Pulse: The world is awash in debt
Interest rates are at all-time lows with the 30-year rate trading below 2% for the first time ever. Is this because the economy is weak (coronavirus), the Fed has an easy monetary policy, or deflation (or at least lack of inflation)?
Corporations are taking advantage of the record low rates by refinancing and also borrowing. For example, Allstate Corporation issued a 4.75% ‘I’ preferred stock last November.
The company used the proceeds to redeem its 5.625% ‘A’ preferred. That maneuver will save the company about $2.2 million per year in dividend payments. A preferred that I held, Saul Centers 6.875% ‘C’, was called when they issued the ‘E’ issue, saving 87.5 basis points.
All of Corporate America will be doing the same with their debt and fixed-income preferreds. The effect of that on earnings is being underestimated if not overlooked. They are also issuing new debt to take advantage of low rates. Individuals are doing the same when they refinance mortgages and take out new loans.
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Global debt, which comprises borrowings from households, governments, and companies, grew over $9 trillion in 2019. That put the global debt-to-GDP ratio to 322%, which is the highest level on record.
The total debt-to-GDP ratio in China was a whopping 310%, and that was before the coronavirus. In the U.S., government debt is rising with the Treasury debt to GDP ratio at its highest level on record. If the ratio is high now what will happen in the next recession?
At an economic conference in Davos, Switzerland, which took place before the virus made headlines, the manager of the world’s largest hedge fund (Ray Dalio) said the equity bull market is not over because there is easy money from low interest rates everywhere.
He said, “If you sell, what do you do with the money?” That has been my point for a few years. The 10-year Treasury yields 1.32% and investment-grade corporates just a little more. Many stocks also yield more.
At that time Dalio owned mostly stocks, some bonds and a little gold. In his world ($160 billion in assets) the income investments we own are not adequately liquid, but they are good alternatives for us. I’m referring to the preferred stocks and exchange-traded debt that I often write about (see Nov. 10, 2019 article). Add to that Business Development Companies (I like Ares Capital, for one). That is our advantage over those that manage billions of dollars.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555.
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