The World Is Drinking From the 'Debt Punchbowl'... And You Will Pay the Tab

The world is drinking from the 'debt punchbowl' – and you will pay the tab... If you think U.S. debt is bad... Poor countries are getting a mortgage break... Why it matters to individual investors... The Argentines know inflation and defaults...

The 'Debt Jubilee' is ramping up, but not in the way you might think...

At least not yet. In the U.S., folks still have time to prepare accordingly for an influx of socialist policies that could "wipe the slate clean," as we wrote about last week.

But it's already too late in many other places...

And worse, it might be you footing the bill for someone else's Debt Jubilee... for people who you don't even know... and for debts that have never entered your mind.

Like, say, from the government of Argentina – which last month defaulted for the ninth time in the past century – or any number of other developing economies around the world.

In today's Digest, I (Kim Iskyan) will explain exactly what I mean...

At Stansberry Research, we talk a lot about the immense risks to the global economic system stemming from rising debt...

In recent months, for example, the Federal Reserve's balance sheet has been exploding. The central bank has pumped $3 trillion into the economy over the past two months alone, and its total assets now exceed $7 trillion...

And it's our children (and grandchildren) who will be paying it all off.

But this behavior is only a small piece of the "debt mosaic" that stretches far beyond the U.S. borders. If you think the U.S. debt is bad...

The rest of the world has also been drinking from the 'debt punchbowl,' too...

According to the Institute of International Finance, an international trade group, total global debt – money borrowed by companies, households, and governments – has risen by $87 trillion since the start of the 2008-2009 global economic crisis... to around $255 trillion today.

Put differently... global debt stands at 322% of total economic output.

That's up 40 percentage points since the last big economic crisis. But gross domestic product is a moving target now, since forecasts of how much economic output is going to fall in 2020 are all over the map. So in reality, this percentage is probably larger.

And total debt is still rising... In April, the issuance of bonds and loans hit a new all-time high, up nearly 25% from the previous monthly record (in March) to $2.6 trillion.

This is partly because companies – such as e-commerce giant Amazon (AMZN), which raised $10 billion last week, part of it at historically low rates – are anxious to pad their balance sheets as they brace for tough times ahead.

And with the Fed spraying money like a Formula 1 race-car winner popping a bottle of champagne on the podium, there's plenty of cash to go around.

But in a lot of ways, the debt situation for the U.S. (and the eurozone and Japan) is an anthill...

At least, when it's compared to the Mount Everest-sized challenge facing those countries that don't enjoy the luxury of being a reserve currency.

The Fed can tap a few numbers on a keyboard to create new money, to bail out small businesses hit by the coronavirus, to pay holders of U.S. Treasurys, or to buy "junk bond" exchange-traded funds ("ETFs").

But if developing economies – for example, from Ecuador to Zimbabwe – just start printing their local currency to buy ventilators, pay bus drivers, or meet a bond payment... they'll spark massive inflation, for starters.

And they'll wind up doing even more damage to the economy than the destruction they're trying to head off.

Total debt from emerging markets has more than doubled since 2010 to $72 trillion today...

The biggest emerging markets include China, India, and Russia... and this debt number also includes $3.2 trillion owed by the dozens of "frontier markets," which are economies that haven't reached "emerging" status yet.

You see, in a world of microscopic yields, investors have tripped over each other in recent years to lend to markets where they can earn interest of around 9% (Zambia's 2015 international bond issuance) or 7% (Tajikistan's in 2017).

Before the coronavirus-inspired crash in global asset prices, bonds issued by Mexico and Brazil yielded around 6.5%. When the global economy is growing, those look like good bets.

But the risk-reward setup has all changed now...

With the global economy in the midst of the coronavirus collapse, many developed economies have been hit the hardest. Those most dependent on trade are seeing demand evaporate... and countries that sell a lot of commodities (oil, in particular) are hurting the most.

Poverty, a weak health care infrastructure, and the physical impossibility of social distancing are prime breeding grounds for the spread of the coronavirus, such as in markets like Brazil.

As we wrote in the June 3 Digest, Brazil's economy is projected to shrink by more than 5% this year. That would be Brazil's worst recession in history.

In the meantime, the country's currency, the real, has lost more than a third of its value against the U.S. dollar since the beginning of the year. And as we wrote, that's a bad sign...

A currency is like a real-time referendum on the perception of the prospects of a country and its economy... and it's clear that the markets are voting "no" to Brazil.

Poor countries are getting a mortgage break...

In mid-April, the G-20 – a group of mostly developed economies – agreed to suspend repayments for government-to-government loans to as many as 76 poor countries for the rest of the year.

The G-20 was thinking of both the risks of a default – as well as the human suffering in poor countries.

The debt postponement was "a plan to tackle the health and economic crises triggered by the coronavirus pandemic and prevent an emerging-markets debt crunch," explained the Financial Times.

Multilateral lender International Monetary Fund ("IMF") is also supporting indebted poor countries.

The G-20 and other government-supported bodies want poor countries to boost their own economies and save lives with the money that they would otherwise be paying them in bond payments.

So governments are pressuring investors in the debt of these countries to join them in allowing poor countries to push back payments and start to talk about restructuring debt.

Restructuring sovereign debt is usually a long and messy process...

And it usually involves swapping old bonds for new ones that carry a lower interest rate, or longer repayment periods.

In the end, investors take a "haircut" – that is, they get back less money than they were originally promised.

This is why individual investors need to pay attention... and know that the Debt Jubilee monster has its tentacles in us already.

You see, the big investors in emerging and frontier market debt are recognizable names...

They include BlackRock (which manages the biggest emerging-market bond ETF), Vanguard, VanEck, Invesco, Fidelity, and other asset managers.

The debt of emerging-market governments is sprinkled in with a lot of high-yield bond funds.

Nearly two dozen emerging-market bond ETFs are traded on the New York Stock Exchange. The largest is BlackRock's iShares J.P. Morgan USD Emerging Markets Bond Fund (EMB), with a market capitalization of around $14 billion.

Without realizing it, a lot of small investors in the U.S. hold the debt of emerging-market governments and companies in their retirement accounts and other funds or ETFs.

In the past, these sorts of big asset managers haven't raised a fuss when countries want them to take a haircut. (Some hedge funds do, though... and in a few high-profile cases, they've eventually forced governments to pay up.) They've just taken the hit – or rather, the people owning their funds have – and moved on.

But this time, according to the Financial Times, the asset managers say they'll play hardball...

Although the need for financial relief is stark in many cases, there are indications that some investment groups may break with the custom of reluctantly accepting financially painful compromises to achieve a restructuring, and instead fight for a better deal.

Some restructuring is inevitable, especially for countries in particularly dire financial straits – like Lebanon and Zambia, which are in the first wave of emerging economies looking to make a deal with creditors.

Then, there's Argentina...

As recently as June 2017, investors had enough faith in the country's turnaround that they bought $2.75 billion of a 100-year bond.

It was faith... or maybe they were blinded by greed and the 7.9% yield on the bond. Either way, they simply ignored the country's history of default. (The IMF went one better, extending $57 billion in loans to Argentina just a year later.)

Now, Argentina is in free-fall...

Like most of the world, a nationwide lockdown has decimated the Argentine economy, which is forecast to contract by about 7% this year. But what's different for Argentina is that the economy was already in dire shape, after shrinking 2.5% last year – and posting inflation of 48%.

When I visited Buenos Aires, the country's capital, in September, the mood was dark. Now, it's apocalyptic...

My friend Tomas, an economist and private investor in Buenos Aires, told me last week on the phone...

We've had MMT here in Argentina for the past 70 years.

He was referring to "Modern Monetary Theory," which argues that governments can pay for huge spending by simply issuing more currency without needing to worry about deficits. However, as Tomas explained, there's a big difference in Argentina...

But here it's not modern, and there's nothing monetary about it. It's just the central bank printing money, giving it to the treasury, and the treasury never has to give it back. It's the only way to survive.

Over the past six months, the printing presses have been running overtime in Argentina...

In a desperate attempt to pay the bills, the government has increased the total monetary base – that's the total amount of currency in circulation or in the commercial bank deposits held by the central bank – by around one-third.

And yet, it still doesn't help.

Most of those wet-ink pesos are quickly converted into dollars...

That's reflected in the 15% drop in the Argentine peso against the U.S. dollar since the beginning of the year. And in reality, the drop is a lot worse...

The dólar blue rate – the black market rate – is around double the official exchange rate. That reflects how desperate people are to get out of pesos. As Tomas told me...

Right now, inflation isn't so bad, because no one is buying anything during lockdown.

Price controls on some consumer items are helping to keep inflation under control for the time being. But the trajectory is clear... "Hyperinflation is on its way," Tomas told me.

In Argentina, inflation hit close to 5,000% in 1989...

So when Argentines talk about high inflation, they're not kidding...

What's next? Argentina won't be the first Debt Jubilee that you – if you hold emerging-market bonds somewhere in your portfolio – help fund. And it probably won't be the last.

In the meantime, the stronger emerging markets will continue to pull away from the rest. (Strangely, South Korea and Taiwan – highly developed economies – are still considered emerging markets.)

And China is in a different universe from the countries of the developing world that are going hat in hand to the IMF. As the Financial Times put it a few days ago...

It is not any more about the whole of [emerging markets] versus [developed markets]. You need to think country, not asset class. The decoupling has just begun.

In other words, it's almost silly to talk about "emerging markets" because it's such a broad term that encompasses everything from Mozambique to Taiwan and back.

But today, investors should be sure to look under the hood of their emerging-market bond funds to see what's really inside. We suggest you make this a regular practice with every investment you have... whether it's stocks, pension funds, or ETFs.

ETFs, in particular, sometimes either don't reflect what their titles suggest or may include assets that you're not aware of – such as emerging-market debt.

Finally, don't get me wrong, all of this matters a lot now... as currencies in places like Argentina and Brazil drop in value relative to the U.S. dollar and as poor countries struggle.

But if and when the Debt Jubilee starts in earnest and that entire $255 trillion global debt tab comes due, then emerging markets might be the least of our problems.

New 52-week highs (as of 6/8/20): Amazon (AMZN), Booz Allen Hamilton (BAH), Equinox Gold (EQX), Home Depot (HD), JD.com (JD), Sea Limited (SE), The Trade Desk (TTD), and Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP).

In today's mailbag, more feedback on Stansberry NewsWire editor C. Scott Garliss' remembrance about World War II and D-Day... and Dan Ferris' "$100 Challenge" essay. Do you have a comment or question? Send it to us at feedback@stansberryresearch.com.

"Scott, Thank you so much for your Friday essay about your grandfather. Every American male should read it. It provides a glimpse of what being a man actually looked like. How great the memories must be of your Pop-pop. There was something uniquely special about the American men (and women) of that era in America's history.

"COMMITMENT and HONOR, values that meant everything back then, are virtually non-existent today in 80% of Americans who are yielding more and more of their freedom in trade of greater (perceived) security. The things citizens of this country find themselves concerned with today are embarrassing.

"Edmond Burke said, 'The only thing necessary for the triumph of evil is for good men to do nothing.' I fear that this country no longer has enough willing good men to overcome the evil that grips society today. Your Pop-pop was certainly one of the greats! My son loved the men of the greatest generation and proudly serves as a Lieutenant in the Army today because of that love. I am forwarding your essay to him as I know he will enjoy it. Thank You." – Paid-up subscriber Rob B.

"Great story about the 'Greatest Generation.' I was born in 1945, just a few weeks after the war ended, so I knew a lot of those guys.

"For example, when I was in my 20s and had begun my career as an engineer in a consulting firm in Seattle, I had started taking flying lessons. One day a fellow engineer, an older gentleman, and I were talking about flying, and the conversation came around to a point where he said, 'I've done some flying; about 6,000 hours, mostly at night.' I said, 'Uh, what were you flying, Jack?' already guessing the answer. He said, 'Mostly Lancasters. Hey, let me tell you about the time...'

"His best friend in the company was a guy who had a hat with one side of the brim pinned up against the crown with a badge. Yep, he had been a Digger. I've always wondered if he had been on the Kokoda Trail, but never asked him. They were just ordinary guys who didn't think doing your duty was anything special.

"My father had enlisted in the Coast Guard and been sent out to Tacoma, Washington. Throughout the war, he kept asking to be shipped out, but was repeatedly told, 'No, we need men to guard the docks and serve on fire boat duty.' He was almost ashamed that he was never sent into combat. It seems that EVERYONE in that war wanted a combat assignment. Think of the movie Mister Roberts. I had spent some time in the Navy and simply took the position that all we can do as servicemen is to carry out the orders we are given.

"There is one more thing I picked up about my parents' generation that I don't think is commonly understood. When I was quite young, my parents would sometimes have friends over on Friday nights to play penny-ante poker, just for fun. I would often curl up under the table, and I heard their conversation, and of course they often talked about the war years. What I picked up was that, at the beginning of the war, there were MANY Americans that were more than half-convinced that we were going to LOSE the war! Nevertheless, their attitude was 'We may go down, but by G*d, we'll go down swinging. We will make them pay dearly.' That is what I remember most about their generation; an indomitable courage." – Paid-up Flex subscriber P. Edward S.

C. Scott Garliss comment: Thanks to all who have shared their memories. I have deep respect for all of who have answered the call and served their country – especially those individuals and families who paid the ultimate sacrifice.

I have very fond memories of my grandparents, and I'm thankful for having known and spent time with them. The same can be said of the importance of my own children's relationships with their own grandparents now. I'm proud to know my story struck a chord with so many of you.

"While reading your treatise on the $100 challenge, a stranger arrived to collect some items I had listed on Facebook Marketplace. After we loaded his items I noticed an old Makita drill that I hadn't used in a very long time. I grabbed it and offered it to the young man, since he had driven such a long way to retrieve my freebies.

"You should have seen the look on his face as he proclaimed, 'Wow, that's a Makita. Are you sure?'

"I'm positive that his drive back home was a very pleasant one. When I made my decision to subscribe to Stansberry, in effect I was taking that challenge to be successful. It just took me a while to throw that $100 (drill) out the window." – Paid-up subscriber Ted B.

"Dan, Congratulations on the lesson you recently wrote about concerning throwing $100 out of the car window to demonstrate our intent to become successful. It's a powerful lesson. Success is rarely accidental. From my experience, [it] generally requires some form of discipline, education and hard work. The question is, how committed are we to being successful?

"The concept of throwing away, or better yet, giving away some of what is important to us is not new. In the Old Testament, The Bible urges its believers to tithe 10% of their earnings to their church and those less fortunate as a tribute to God. Get that, not $100, not $400, but 10% of their earnings.

"I have known several individuals who adhere to this dictum, and all have been very successful people... not just in their financial lives, but in their professional, social, familiar and spiritual development as well.

"Giving away some of the fruits of our labors keeps us from being selfish, and more aware of the needs of others. It can be a way of showing that we are thankful for what we have been blessed with, and not only confident in our own abilities and future, but, for those who believe in God, a 'leap of faith' that He cares for us and wants us to be successful." – Paid-up subscriber Bob B.

"We can see the $100 Challenge in different ways. I did my own version last December and decided to become an Alliance member. It was a very significant (some would say crazy) commitment, but I can see it pays by itself rapidly. I'm not there yet, but I already feel being a more complete investor today than 6 months ago.

"I would also recommend to be open minded (still working on it on topics like crypto and stops), but I see interesting things in metals (silver, gold) and commodities that I would not have been interested before. So even if some of the letters are not interesting us at first, I really think they can help us become a better investor, and open up our possibilities of gains.

"I would thus like to compliment [the whole] Stansberry team for their good work, and a special thanks to Doc for all the health information that he is writing. I truly appreciate." – Stansberry Alliance member Alain R.

Corey McLaughlin comment: Thanks, Alain. Glad you have found great value in your Alliance membership already. You're not the first person we've heard make the analogy to the $100 Challenge.

Regards,

Kim Iskyan
Singapore
June 9, 2020