Daily Gains Letter

Global Sovereign Debt Skyrockets, Bubble to Burst

By for Daily Gains Letter |


“Risk” is a four-letter word.

It’s the kind of thing you wish you spent a lot more time thinking about before a shock actually happens.

Right now, the Federal Reserve is re-inflating assets while sovereign debt skyrockets. It’s been doing so for a number of years now, and the stock market is moving.

Stock market action illustrates that it doesn’t pay to fight the Fed. But one of the biggest trends in the stock market’s performance over the last few years is the strength in blue chips that pay dividends. You don’t need a highflying technology stock in this kind of market.

With so much sovereign debt growth and uncertainty that continues unabated, I think all investors need is to take a fresh look at their portfolios and re-evaluate all holdings related to risk.

The sovereign debt crisis in Europe and the U.S. is ongoing. There is a failure on the part of policymakers in many countries to be more public and more aggressive in dealing with this issue.

The stock market is at risk. All market participants, including investment banks, individual investors, and institutions, need to be more vocal in talking about debt and its consequences for individuals and countries.

News of massive new monetary stimulus from Japan, a copycat strategy in a sense, is just totally irresponsible. Japan’s gross government debt as a percentage of gross domestic product (GDP) is now over 230%, according to the International Monetary Fund (IMF). Greece’s performance has actually improved, now sitting somewhere around 170%. And the IMF estimates the U.S. economy’s total sovereign debt as a percentage of GDP at approximately 107% as of the end of 2012.

Things do happen. Countries have to borrow money. Sovereign debt will always be a reality. There are extraordinary geopolitical events that take place, and action requires money. But when this is combined with poor or non-existent economic growth, that’s when you get a sovereign debt balloon, and it’s a very difficult cycle to break.

The other issue, of course, is prudence. A big portion of Greece’s tax base was not paying its share, so there’s no way (with entitlement programs) that a system like this is sustainable.

It’s time now for policymakers to voice action plans for dealing with sovereign debt. And not just on an individual country basis, but on our “eurozone” basis—a United States basis. Action plans to try to beat the next big disaster. Time is running out.

The stock market is about to enter another earnings season, and this will consume investor attention, unless there’s a shock. Whatever happens to the stock market, individual investors need to be extremely cautious, not for what corporations say about their businesses, but about the landscape in which you have holdings.

I’m not worried about the stock market and its valuation, nor am I worried about the near-term outlook for corporate earnings. It’s the whole other world that’s the problem.

Investment risk in a stock market portfolio will never be zero. But I think that in this kind of environment, where sovereign debt, money supply, inflation, and defaults are all beyond your control, stock market investors need to be extremely cautious. Only consider the most stable blue chip companies right now, because the financial world is no longer safe.

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