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Inside the Market ‘Debt clock’ ticks towards midnight for Canadian economy

A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web

Citi economist Dana Peterson detailed the shocking rise of global debt in a report called “Global Debt Clock – Are We Headed for a Global Debt Crisis?,”

“In 1999, global debt tallied to US$79 trillion, but has since swollen to US$247 trillion as of 1Q 2018 – a more than three-fold increase in level terms or by 211 percent.”

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Ms. Peterson included Canada among nations most at risk of a credit crisis according to the important metric of debt to GDP. This is not that surprising in light of record levels of domestic household debt, but the details are interesting. In effect, the report concludes that households and corporations, not the banking system, are most at risk of credit upheaval in the next 3 years,

“Using our own measures of [debt service ratios] through 3Q 2018, 4 of 25 economies in our sample have private nonfinancial sector DSRs currently signaling risk of a financial crisis over the next three years. Given a more robust set of measures of to include in the DSR have we compile a slightly different list of economies relative to the BIS. Hong Kong (9.6), China (6.4), and Turkey (6.9) each have Citi estimated DSRs that are 6 percentage points above their respective LT averages, suggest risk of a crisis within one year using the BIS threshold. Canada’s current DSR suggests risk of financial crisis within three years, by our estimates.”

“@SBarlow_ROB C: Canada at risk of financial crisis in next 36 months” – (research excerpt) Twitter

“ @SBarlow_ROB C on global debt : “By share of own GDP, Canada, HK, Japan, Lebanon, the Nordics, peripheral Europe, Singapore, and South Korea have the most troubling metrics”” – (research excerpt) Twitter

Related: “Morgan Stanley warns ‘winter is coming’ for bank stocks” – Bloomberg

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Michael Batnick, director of research at Ritholtz Wealth Management, explains why retirement spending is the most difficult problem in finance. The entire post is worth reading, but here’s a sample,

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“The danger of assuming compound annual growth rates when making long term projections can be seen in the chart below. The black line shows that spending a constant $40k annually, using the returns from the previous chart, an investor would run out of money in the 19th year. Spending 4% and assuming a 2% inflation rate, a more realistic assumption, an investor would run out of money in just 15 years. Side note, if the returns above were to happen in reverse, in other words the bear market comes at the end of the period, an investor with the same spending would be left with $1.3 million”

“The hardest problem in finance” – Batnick, Irrelevant Investor

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The Financial Times warned about concentration of passive investments in three companies,

“The Big Three of the US industry — BlackRock, Vanguard and State Street — have gained such size and efficiency that they control 80 per cent of the money invested in US index funds. Even Jack Bogle, founder of Vanguard and pioneer of the modern US index fund industry, is alarmed by their success. He has warned that, “if historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large US corporation”… Like other consumer technologies, index funds have brought great benefits to ordinary investors. But Mr Bogle’s innovation, useful as it remains, may be working a little too well. ”

“Index fund managers are too big for comfort” – Financial Times (paywall)

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Tweet of the day:

Diversion: “'There are no odds in a game of chicken' with China on trade” – Epsilon Theory

Newsletter: “The perplexing poor performance of TSX bank stocks” – Globe Investor

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