Beware Elephants charging.
Debt is the elephant in the economics room. The last thre years has seen debt of any sort rising – college debt, household debt and especially debt raised in desperation by companies trying to stay alive, junk debt. The FED are now engaged in clear site in underwriting this debt with continued low interest rates and injections of funds of one stripe or another – QE4. Overall national debt already around $26 trillion is ballooning at a further $1 trillion each year. Th political results are encouraging with the stock market at record highs and P/E levels well above par.
But the best parties have to come to an end. What if inflation creeps back? What if those interest levels have to rise? a 1% point change adds up to a 25% increase in costs for a 4% current loan.
The weekend WSJ showed how the current tight labour market is indeed starting to lead to higher pay. Lower skilled wirkers gained 3.7% in november. Warehouse worker pay in Atlanta has risen 25% in the last two years. The next correction will be caused by wage led inflation. Beware elephants charging.
Have a good day, James