Debt cuts both ways. When you’re borrowing, you love debt, because you can invest/spend someone else’s money. When an individual borrows money, it’s that person’s own pride, ethics and actions, along with having to conform to our society’s laws that make the borrower feel compelled to pay that money back.
When you run a company and borrow money, there’s less personal pride, ethics and actions that make the company borrowing the money pay it back. The laws are probably a bit less harsh on corporations that don’t pay money back as they are on individuals (see, for example, how the giant banks that couldn’t pay back their loans were bailed out with trillions in welfare back in 2008 through today while individual borrowers that couldn’t pay back their loans are mired in bankruptcy courts.)
Public debt, which suffers from a terrible but inherent “agency problem,” is even worse. I like how Wikipedia explains this concept:
The principal–agent problem (also known as agency dilemma or theory of agency) occurs when one person or entity (the “agent“) is able to make decisions on behalf of, or that impact, another person or entity: the “principal“. The dilemma exists because sometimes the agent is motivated to act in his own best interests rather than those of the principal. The agent-principal relationship is a useful analytic tool in political science and economics, but may also apply to other areas.
Governments borrow trillions of dollars and that money flows to corporations who lobby to benefit from that money (a little bit of that money actually flows down to taking care of poor people directly) but the payback of those loans falls upon the entire society at large. The politicians, bureaucrats and other scammers at the top of the political food chain have a clear incentive to borrow as much as possible in their taxpaying public’s name since the benefits of that borrowing flow to themselves while the pain of servicing all that debt falls to other individuals and companies across the society.
The Greece debt debacle that we have seen extended over and over for the last five years by the politicians, bureaucrats and other scammers at the top of the Greece and EU political food chain underscores this agency dilemma playing out. The US, Germany and every other developed nation which has borrowed trillions of dollars will some day (probably still several years away) have to deal these same kinds of issues.
Think through how all these hundreds of trillions of dollars that the governments in the developed Western nations have borrowed will still have to be serviced and/or eventually paid back in full. You can see why I always say you should have a little bit of physical gold coins and precious metals to hedge yourself for possible future bailouts, bail-ins, debt jubilees and other ways these heavily indebted countries that issue and control their own fiat currencies will deal with their own debt problems in future years. Remember that the amount of debt keeps growing and someday interest rates will rise globally again too.
If a tiny little country with too much debt is causing these current market dislocations, you can imagine how we’ll likely see another huge stock market crash some day when the US and/or the EU and/or Britain and/or FILL-IN-THE-BLANK country deal with their own debt problems.
The question with this type of stuff, as usual, is one of timing. I wouldn’t try to game the next major crisis anytime soon, as the forces of 0% interest rates, bailouts, bail-ins, corporate welfare, policies focusing on maximizing corporate profits, and so many other factors remain very bullish.
But having a few gold coins hidden somewhere, maybe having 5-10% of your long-term money in some gold coins and bullion and precious metals is probably a good idea in world of unethical, corrupt and greedy politicians, bureaucrats and other scammers have access to borrowing trillions in your name.
As for trading these markets near-term? I think it’s time for my Go-To poll: Who’s more scared right now, the bulls or the bears? Send me an email or reply to me on Twitter or Scutify and let me know. I’ll compile the answers and maybe we’ll have one of our wildly unanimous results that can give us an edge on sentiment. And since sentiment often drives the stock markets near-term, maybe we’ll find edge for our next trade too.
Other than that, I’d like to see one more panic as the Greek debt debacle can kicking games continue this week and into next.
One other note: Sony files to raise $3.6 billion using debt (did I mention debt today?) and stock. The company wants to invest most of that money into their image sensor business that Apple and Samsung and others use for their smartphones and which many upcoming wearables will also use. I think there’s a lot of ways to win with Sony over the next year or two as the image sensor business booms and their film/TV video library continues to boom too. I’m holding my existing Sony common stock steady and if the stock gets closer to $25 again, I might look to buy back some of the shares I’ve trimmed.