From the Globalance Investment Commentary (Wealth Cockpit):
Credit is a critical element of the global economy. Banks create new money by issuing loans. The production of goods and services (companies) and consumption (households) are fostered by credit creation. What matters most is that new money leads to new production. When this happens, the additional money is balanced by a larger supply of goods and services.
When this doesn’t happen, it results in inflation or even asset price bubbles. Rising asset prices attract more investors and induce credit-funded speculation. The system swings upwards then eventually crashes, with the crash ending the distortions.
The adjacent graph shows how risky the current situation is. The grey line indicates the change in share prices of the 500 largest US companies. The coloured bars show the investors’ accumulated USD net balances (above the 0 line) or net credit (below). The deeper the red bars fall, the more shares were purchased on credit.
The chart tells us the following:
- Increasing indebtedness is driving share prices higher.
- Once the credit peak is reached, the stock market will experience a correction.
- The debt figures from May 2015 are at an all-time record high.
Investors should brace themselves for the fact that this party will eventually end.