George Soros is Right

George Soros is very, very left. But in this case, he’s kind of right — kind of correct, that is.

Hear me out.

About last week’s market turmoil, George Soros just said it "reminds me of the crisis we had in 2008."

After a near-5% decline on the major U.S. stock market averages over the course of just one week?

It’s a bit presumptuous to say this feels like 2008 all over again. That is, unless you’re living in Canada where the real estate market has bubbled and households have not deleveraged.

But comparing last week’s price action to the market collapse in 2008 is premature, if not erroneous.

Yes, there is at least one reason 2016 is 2008 all over again.

But there is a separate reason why 2016 won’t turn out the same way 2008 did.

Those reasons come down to two numbers: $225 trillion and 0.25%, respectively.

$225 Trillion

Debt is the same today as it was in during the 2008 financial crisis.

Actually, it’s worse.

One estimate puts global debt at about $225 trillion. That puts global debt-to-GDP in the ballpark of 250%.

This chart is dated, but it encapsulates the change in debt levels from 2007 through the end of 2014.

Basically, debt increased by $57 trillion through the end of 2014.

One notable newcomer to these debt shenanigans is China. Debt in China has roughly doubled from levels before the global financial crisis. Debt-to-GDP now sits north of 240%.

Granted, we’ve known the magnitude of this surge in Chinese debt since early last year.

China has joined the party after major stimulus efforts by the People’s Bank of China.

It’s a trend that’s likely to continue inside and outside of China.

0.25 Percent

Consider the condition of global economies:

  The World Bank cut its 2016 growth forecast from 3.3% to 2.9%.

  The head of the International Monetary Fund said global growth will be disappointing and uneven in 2016.

George Soros may have been right about the debt similarities between now and 2008. But he was wrong about the comparative health of underlying global economy.

If the supranational organizations above are to be believed, the global economy is far worse now than when things came unraveled in 2008.

That’s a good thing because the dirty laundry has been aired. Growth struggles should not surprise investors. Policymakers learned this from the financial crisis, and now they factor this transparency into their perceptions/management efforts.

But it’s also a bad thing because policymakers in developed markets are further from policy normalization than many expected.

The Federal Reserve’s 0.25% baseline interest rate is nothing and everything.

It is nothing as far as a respectable, market-setting rate of interest goes.

It is everything to this market. Still.

For when the Fed signals its need to stay put at 0.25%, it cedes control to the market and opens up the perceived chances for a move back to zero or even into negative territory.

The Road Goes on Forever and the Party Never Ends

As New Year’s predictions blossom, a handful of analysts believe we have reached the end of a 40-year debt supercycle.

Have we?

The end of a debt supercycle could cause a significant decline in financial markets. But it would be much more protracted than a 2008-esque crisis.

Nevertheless, let’s say Mr. Soros is mostly right and markets around the world truly do collapse a la 2008.

What’s the response?

What are policymakers going to do?

They’re going to do the only thing they know how to do: try desperately to inject the financial system with cash and the financial markets with confidence.

In what capacity will they act, considering the Fed has only even slightly begun to normalize?

Someone I respect read research to suggest the Fed, for example, will seek to fully monetize the Treasury market with outright dollar-for-dollar purchases of bonds.

To wit, Kenneth Rogoff, a Harvard economist known for his research and analysis on debt, suggests central banks have plenty of room to use their balance sheets to manage a crisis in confidence that threatens to pressure borrowing costs higher.

Should they further inflate their balance sheets? Probably not.

It sounds crazy, but what’s stopping policymakers from further enabling the global debt jubilee to the degree that think they can?

Not much.

Look at the Bank of Japan.

Japan is going on — what — its third lost decade?

Japan easily exceeds the rest of the world in total debt levels at $11 trillion. Yet many analysts are wondering if the BOJ is set to embark on further quantitative easing measures.

Can anything stop this debt parade when policymakers could undermine financial system stability?

Eh, let’s not worry about that now.

Suffice it to say: Be careful not to get caught in a market crisis of the kind Soros is warning.

But don’t be surprised when the markets react positively to accommodation affirmation from central banks.

Do right,

JR Crooks

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…