In this world, nothing can be said to be certain, except …..

……debt and collateral.

I’m shamelessly butchering Benjamin Franklin’s famous ‘death and taxes’ quote.

And the reason is that before we get to both of those certainties, the surest thing is a debt funded world for decades to come, if not longer.

And almost bizarrely, it means that equities won’t materially go down, and interest rates won’t materially go up, for any extended period.

Why?

Central banks can’t let it happen if they want to avoid another 1930s in asset prices and a global default.

Sure, there will be always be downdrafts, flashes and capitulations, that’s the way of markets, but until there is a debt solution, the trend is higher equities and lower rates for longer.

Remember, equities only took a month or so to recover after March 2020.

And if there’s another crunch, centrals and governments will step in and stimulate.

Why do I say that?

Think of global leverage as the biggest pipe you’ve ever seen, full of unfathomable IOUs including $280 trillion of global debt and well over $1 quadrillion of derivatives.

Now, let’s estimate gross world product (i.e., global GDP) at maybe $83 trillion.

Those metrics suggest terrestrial debt to be more than 16 times bigger than one year of terrestrial production.

And out of production has to come global wages and income taxes to house, clothe and feed the world for another year - and unfortunately after that lot there’s nothing let.

Proof?

World Governments have a combined deficit of around $10.5 trillion - so as a whole, world governments are broke.

That means the shortfall has to come from higher taxes (maybe), lower government spending (not during COVID and energy transition with another US$3.5 trillion budget plan just approved), or, you guessed it, debt.

And, based on numbers after tax, after bail-outs and after larger deficits - it will probably take between one and two generations of rehab to pay down the terrestrial debt stack to a reasonable level.

But in the meantime, deficits and carry forward debt obligations need to be serviced, and rolled/refinanced, indefinitely.

To do that requires one key ingredient. Collateral.

Collateral is comprised of bonds, equities, real estate and similar hard assets.

In the Defi sector of the cryptoverse it’s comprised of bitcoin - and some of the stable coins. But while centrals don’t have any control over bitcoin, they are now in control of bond and equities markets.

Equities, bonds and similar markets cannot be allowed to deflate (after having been inflated by the central banks for so many years now) because they form the collateral and produce the yield that’s necessary to collateralise and service the global debt stack.

You can’t secure a mortgage without the real estate, right?

Same with global debt.

In short, bonds, equities and hard assets are used to underpin terrestrial leverage, and without them (or in the absence of central banks propping up markets during a crisis) the system of fractionalised credit and money as we know it would be over.

If debt is the pipe, collateral is plumber’s tape. And no plumber or DIYer wants to run out of that magical stuff.

So, it seems to me that there might be a better answer to the question of “when will the market crash”?

And it’s that just maybe, it’s not allowed to for any meaningful period.

Maybe in this new normal (yes we have arrived) nothing can be said to be certain, except debt and collateral, and that might mean that equities and bonds are now too big to fail.

Mike.

Next Level Corporate Advisory is a leading M&A and capital markets advisor with a 20 year track record of delivering the highest quality of independent financial advice as well as strategic transactions to help our clients level-up.

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