Debt Trends

Highlights We expect the U.S. House of Representatives to remain in GOP hands, but the Democrats could take razor-thin control of the Senate if Clinton wins the Presidency. The current, market-bullish status quo of divided government will continue. The chances of cooperation between a Clinton…

Highlights China's rising debt-to-GDP ratio is the mirror image of rising assets, due to a combination of rising capital intensity in the economy, falling returns on assets, falling profit margins and declining efficiency. The country's ever-rising debt-to-GDP ratio in recent years does not…

Investors are overstating the legal and political constraints to "helicopter money"; The BoJ and BoE have few legal hurdles, whereas the ECB would have to get creative to stay within the existing law; Inflation-phobia in Germany will wane if the choice becomes euro survival; The BoJ has…

In China and the majority EMs, credit impulses will be negative over the next 12 months as and if their credit growth converges towards their current nominal GDP growth. These negative credit impulses will dampen EM/China growth and their corporate profits. In the next 12 months, the credit cycle is most vulnerable in China, Brazil, Turkey, and Malaysia and least vulnerable in central Europe, the Philippines, and Mexico.

Our primary argument for continued EM/China growth disappointments is that their credit growth is set to decelerate further and credit impulses will remain negative, depressing economic growth. Rising LIBOR could lead to a stronger U.S. dollar versus EM currencies. In Venezuela, the economic and financial situation will continue deteriorating hindering any further rally in its sovereign and corporate credit.

This week, we are sending a <i>Special Report </i>written by BCA's Chief Global Strategist Peter Berezin, discussing the end of the 35-year global bond bull market.

The fundamental reason behind the debt buildup in the Chinese economy is rooted in its high savings and banking-centric intermediation system. It is wrong to focus solely on the liability side of the economy. Viewed from a balance sheet perspective, China's debt situation is much less dire than commonly perceived.

The median voter theory is one of the few genuine theories of political science. It assumes that voters have limited policy priorities and that politicians want power. Therefore the latter will adjust their stances to satisfy the largest swath of voters. The median voter in the Anglo-Saxon world is shifting to the left, and regardless of what happens in the Brexit referendum or the U.S. election, this shift will be the most consequential development for markets.

The median voter theory is one of the few genuine theories of political science. It assumes that voters have limited policy priorities and that politicians want power. Therefore the latter will adjust their stances to satisfy the largest swath of voters. The median voter in the Anglo-Saxon world is shifting to the left, and regardless of what happens in the Brexit referendum or the U.S. election, this shift will be the most consequential development for markets.

Abenomics has disappointed, but not failed. The Bank of Japan could move to debt monetization next year, which would be positive for Japanese equities and negative for the yen.