by Robert Gore
A tedious ritual this time of year is lengthy Review and Preview articles, in which financial publications and websites highlight the year’s winning picks, acknowledge the losers, and prognosticate about the coming year. Does anybody read them? Probably not. The only way SLL’s Review and Preview will get read is if it’s short, so here goes. The year 2015 in review: SLL pretty much got it right (see Debtonomics Archive for confirmation). Preview of 2016: things will get much worse. There, that’s out of the way.
The global economy has been sucked into the event horizon of the black hole of debt. The world does not enough assets and cash flows to service $225 trillion in debt, or almost three times gross world product, and sustain economic growth. Most financial assets are somebody’s debt, an increasing percentage of which is impaired, and mounting debt service is taking a larger share of cash flows. Consequently, trend growth rates are declining, with some countries already in recession (e.g., Canada, Russia) or depression (Brazil).
This is the margin call phase of debt contraction. When speculators employ leverage, they put up some percentage of the initial speculation, called equity, and borrow the rest. The loan is secured by the speculative asset. If the price moves against a speculator and equity shrinks, the lender will demand that the speculator put up more money (or “margin,” hence the term margin call). If the speculator is unable to maintain the required equity, the lender liquidates the collateral-asset.