By Michael Foster
One of the silliest doom-and-gloom stories youaEURtmll hear these days is how weaEURtmre all going to be destroyed by debt. ItaEURtms just plain wrongaEUR"and letting this fear win could mean a crippling blow to your nest egg this year and beyond.
In fact, itaEURtms already caused one group of investors to miss out on a massive 265% return, as IaEURtmll explain below.
Getting Half the Story
The easiest way to understand how the debt terror works is to bring it down to a single example. I like to use Mark Zuckerberg.
Back in 2012, Zuckerberg got a mortgage for about $6 million. Now if I didnaEURtmt mention ZuckaEURtms name and just told you that I knew of someone who took out a $6-million mortgage, you might think this person was terrible with money and headed off a financial cliff.
But when I told you the rest of the storyaEUR"that I was talking about someone worth tens of billions of dollars whoaEURtms the CEO of one of the worldaEURtms largest companiesaEUR"that $6 million suddenly looks like nothing.
This is a pretty basic example, but itaEURtms exactly how you should think when you hear pundits warn of the aEURoetrillions of dollarsaEUR in debt the US government has, or the massive debt bubble in corporate bonds, student loans or whatever hysteria theyaEURtmre pushing.
ItaEURtms all a half-truth, because they arenaEURtmt giving you the full picture. But IaEURtmll always give you the full picture, so letaEURtms dig into the details.
The Debt Situation Right Now
Lately, youaEURtmve probably seen scary headlines like this recent one on CNBC: aEURoeGlobal debt hits a new record.aEUR
That sounds bad, of course, and the number behind it sounds scarier. All told, $247 trillion of debt exists around the world. America owes nearly a tenth of that, with our $21 trillion of debt being called aEURoea dire threat to our economic and national securityaEUR by National Security Director Dan Coats.
Of course, itaEURtms CoatsaEURtms job to be hypersensitive to danger. And the charts do indeed look scary; look at how total public debt has ballooned over the last decade:
DebtaEURtms Seemingly Unstoppable Growth
But letaEURtms look at the asset side. Is the world too deep in the hole, or does it have enough collateral to make its debt load manageable?
The WorldaEURtms Wealth, by the Numbers
This is a harder question to answer than you might expect. While there are many independent estimates of the worldaEURtms debt, there are few studies of the worldaEURtms wealthaEUR"again proving the bias toward fear when it comes to this issue.
Part of the reason is that itaEURtms tough to estimate the value of the worldaEURtms wealth. How much is the Taj Mahal worth? The White House? Yosemite National Park? How could one even begin to speculate about the value of the many wonderful cultural and historical artifacts humanity has produced across millennia?
ThereaEURtms another problem: some wealth is debt. Let me explain.
Think of ZuckerbergaEURtms $6-million mortgage. That was his debt, but it was also his bankaEURtms asset. In credit, the debtoraEURtms debt is also the creditoraEURtms creditaEUR"meaning itaEURtms classified as an asset held by someone else. For this reason, the worldaEURtms wealth must by definition always exceed its debt.
Which is why the worldaEURtms wealth exceeds its $247-trillion debt by all estimates. One of the most respected estimates puts all of the wealth in the world at $317 trillion at the end of 2018aEUR"although that measure, by Credit Suisse, doesnaEURtmt include things like the Taj Mahal and the White House. So consider it a conservative estimate at best.
So is the world overly indebted?
At that amount, the worldaEURtms debt-to-asset ratio is 77.9%. In other words, if the world had the median wealth of the average 50-year-old American, whoaEURtms worth $84,542, the world would owe $65,858aEUR"or maybe a car loan or two, and some credit card debtaEUR"but would have a paid-off house.
Would anyone say someone with a debt-free home and a few debts is facing a financial crisis? Of course not.
Things look even better in America. Because America owns $98 trillion of the worldaEURtms wealth, its debt-to-asset ratio is less than half that of the world average. In other words, America is one of the least indebted and financially healthy countries on earth.
Sources: Credit Suisse, Federal Reserve, Bloomberg, CEF Insider
Again, put it in perspective: if America were the average 50-year-old, it would owe just $31,787. This is far from a crisis. Yet whenever I tell people this, they have a hard time believing it. All the time, we are told thereaEURtms too much debt and that weaEURtmre facing a crisis. That panic is simply wrong, as the data proves again and again.
If this seems academic to you, let me assure you it isnaEURtmt.
Fear of debt drives individual investors to make bad decisions, like buying gold out of fear that the next recession is just around the corner, as the gold bugs love to warn us. ThataEURtms why the yellow metal was especially popular at the height of the financial crisis in 2009. Trouble is, its return since then is pathetic compared to US stocks.
Equities Crush the Debt Hounds
But people listen because panic sells and it just sounds right that debt is bad. But these folks have missed out on a 265% return!
That matters now because equities took a nosedive in late 2018, based on the fearmongersaEURtm incessant warningsaEUR"but since none of those warnings are right (debt is actually manageable, earnings keep rising, wealth is growing faster than debt, incomes are up while unemployment is down and so on), stocks are beginning to recover.
The bottom line? Now is the perfect time to buy stocks.
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