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Beware of This “Crocodile” of Debt Deflation

Here’s “a highly unusual situation which is probably unsustainable”

by Bob Stokes
Updated: October 08, 2020

In the U.S., debt has inflated over the past few decades, and it appears that this trend is set to reverse in a major way.

Murray Gunn, Elliott Wave International's Head of Global Research, combines serious analysis with a humorous perspective as he shows this chart in our October Global Market Perspective:

DebtDeflationAhead

If you used your imagination and squinted your eyes a little, the chart could resemble a crocodile with its mouth wide open (ok, ok, maybe after a dram or two). The chart shows the level of Non-Financial Corporate Debt as a proportion of Gross Domestic product in the U.S.A. as well as the Moody's Seasoned Baa Corporate Bond Yield. That bond yield series represents the middle-to-lower quality of corporate debt.

Since 2012... corporate debt has advanced relentlessly, zooming higher over the past year. On the other hand, corporate bond yields have continued to decline. This would appear to be a highly unusual situation which is probably unsustainable.

This brings to mind what unfolded in Japan.

Rates and bonds yields collapsed there in the 1990s. That was accompanied by the beginning of private sector debt deflation, which stretched for a couple of decades, as the Global Market Perspective points out.

So, it wouldn't be surprising if a similar development unfolded in the U.S.

Also, keep in mind what the 2020 edition of Robert Prechter's Conquer the Crash noted:

As mood continues to trend toward the negative, fear will increase, deflation will accelerate, the incomes of businesses and governments will decline, and bond investors will begin to worry about losing their principal due to bankruptcy and default by bond issuers. That's when they will start selling bonds, making interest rates go higher. Rates on the weakest issues will rise the fastest, but eventually fear will spread to holders even of formerly presumed safe paper.

Are you prepared for a historic global debt deflation?

Here's what the British newspaper, The Telegraph, said on Oct. 2:

Deepening deflation pushes southern Europe closer to a debt spiral

Eurozone slides further into a debt-deflation trap...

Now, get more insights into the prospects for a historic debt deflation from an Elliott wave point of view in the comprehensive Global Market Perspective.

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