Here are two conundrums facing the world today. Above is the image of the Shanghai #Composite Index. Image: Google
If you remove the present distress due to the real estate market, the Shanghai stock market is almost flat if you look point-to-point over the past five years. #HangSeng has given negative returns last year, this is the stock market of one of the most innovative economies over the last decade. During the last decade, China had a decent growth rate and produced some of the most innovative companies in the world. If stock markets represent what various actors are willing to pay for the future earnings of companies, the stock market index reflects an image of a company that is either in deflation or struggling to innovate. Sadly, both these scenarios seem not to be true. The Shanghai Stock Market has just given a return of 56.08 percent since 02-07-1997. This is unbelievable. The #Nasdaq Composite has given a return of 31.21 percent last year. (SSE Calculation Yahoo Finance). Over the years, China is on the front of digitalization and innovation with brands like Alipay, BYD, Huawei to name a few world class companies. The real estate downfall has been on the cards for a while as China has excess capacity within the residential and commercial real estate sectors showcased by leading economists. The onset of the pandemic exacerbated the situation yet the Chinese government dismissed the red flags.
The National Debt Is Now More than $34 trillion. What Does That Mean?, courtesy of Peter G. Peterson Foundation
Second, there is the $34 trillion of debt in the U.S. economy. According to the Peter G Peterson Foundation, the gross federal debt of the U.S. is more than $34 trillion – roughly equal to the sum of the economies of China, Germany, India, Japan, and the United Kingdom. $27 trillion of debt is held by the public plus $7 trillion is intragovernmental debt. Despite this colossal debt, Americans are nonchalant about the rising debt even with interest rates at one of the highest points in recent times. With the realty market hit, Federal Reserve Chair Jerome Powell in his recent interview is predicting that more small banks will likely close or merge due to commercial real estate weaknesses, but that the problem is ultimately “manageable.” However, if you look at the debt levels, this becomes a significant problem. With high wage inflation and job growth, the Fed is not going to aggressively cut interest rates except for maybe three cuts (75 basis points) this year. 100 basis points is equal to 1%. Although the U.S. stock market had the best year in decades last year and rise in productivity in America, the huge debt, high interest rates along with problems in real estate in cities like New York might have far-reaching consequences earlier than expected.
Are we looking at an Armageddon?
The world is getting more divergent and we are sitting on a ticking time bomb?
Many leading economists and thought leaders, including Nassim Taleb, have also mentioned the dangers of the debt trap.
It’s time to reinvent, think out of the box, especially for China. They need to relook at their underlying economy’s fundamental drivers. The US has to increase its savings rate backed by more fiscal prudence. As geopolitical risks persist globally, the global debt crisis could be one of the most serious problems facing humanity.
Note: The read is not an advise for investing in equities or any asset class. Kindly contact your investment advisor for any asset class exposure. The text was revised after its initial publication.