The Market Bull – November 13, 2018
The major averages finish another volatile day of trading mixed on little real news. Oil becomes the latest asset class to enter bear market territory with a decline of 20% or more.
More than a few pundits have famously quipped that “debt doesn’t matter” predicated on Keynesian economic theory and that one person’s debt is another person’s asset. Aside from the common-sense perspective that screams otherwise especially when one considers the return on borrowed capital. Numerous studies have shown that debt does matter a great deal.
When economic growth fails to keep up with the assumption of debt, ever lower interest rates lead to escalating debt burdens and dangerous asset bubbles. When the inevitable bust occurs asset prices are impaired, but the debt remains, leading to bankruptcy and foreclosures on a grand scale. This is why the return on investment is so important. If it isn’t positive the entity is living on borrowed time. A case in point is that some 15% of the companies in the Standard and Poors 500 Index are considered “zombies” excessively indebted and cash flow negative. Many got there by borrowing money to buy back shares and issue dividends, General Electric being a great example. Governments routinely spend more than the receive in taxes running deficits in the process, as far as the eye can see. Nearly 75% of government spending is non-productive.
With the debt fueled crisis this time round most likely to be a corporate one, a generous assist from overly indebted consumers, is all but certain.
Standard and Poors 500 Index closed at: 2,722.18 down 4.04
NASDAQ finished the day: 7,200.88 up .01
Gold ended trading at: $1,202.80 down $.70
Read More: The Economic Consequences Of Debt
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