A few articles were published last week that highlight what we think is an under-appreciated story as it relates to future global economic growth: leverage. A lot has been made of the record equity market levels in countries or regions whose central bank has engaged in large scale asset purchase programs. The U.S., U.K., Japan and now the Eurozone immediately come to mind. What hasn’t been in focus is the record amounts of debt that have piled-up around the world.
This matters because rising debt levels cannot go on forever, and when the party stops and deleveraging starts, the victim will be GDP growth (see the U.S. economy in 2008-2009). Slowing economic growth typically leads to low inflation, which typically leads to low bond yields. Could leverage continue to increase and global growth continue moving upward in the recent range of 3-4%? Yes. But if leverage flattens out or declines, look for growth to follow, which would be supportive of bond prices both here in the U.S. and around the world.
Source: McKinsey Global Institute, U.K. Telegraph, Wall Street Journal