China, the nation that helped bull the global economy out of the last financial crisis, is slowing markedly. China is also facing a debt problem. From 2002 to 2008, China’s total debt/GDP ratio was fairly stable and remained below 150%, but is now about 250%. It is possible that China’s debt issues may be contained within the real estate sector, which is the most troublesome part of the Chinese economy. It remains to be seen whether that distress bleeds into the broader economy. For now, corporate credit conditions in China still remain stable.
For that matter, debt across the world in both developed and emerging economies has once again reached new highs, making for a highly leveraged global economy, which as we’ve seen before makes for heightened volatility. The chart at right illustrates the magnitude of the debt.
As we’ve mentioned before in these pages, corporations have been pushing everything they can to get earnings from cutting costs as much as possible to avoiding internal investments so much so that by now, according to the Commerce Department, the average age of fixed assets, such as plants and factories, is about 22 years-old, the oldest average going back to 1956. That doesn’t sound to us like a set of solid fundamentals for a high-flying market.