What keeps our economy going?
Ernest Hemingway lived in Paris as a young man during the 1920s. He called it “a movable feast.” The intellectual fellowship he experienced with notable writers and artists like Ezra Pound, Gertrude Stein, F. Scott Fitzgerald, and many others stayed with him for the rest of his life. He could always look back on that time and draw on its nourishment.
Leverage is our economy’s movable feast. But when we gorge ourselves, it feeds crisis after crisis. Ten years ago individuals borrowed money they didn’t have to purchase homes they couldn’t afford on the premise that someone would come along with more money to buy them out. The housing boom and financial bust threatened the global economy. Twenty years ago, Asian “Tiger” economies were propping themselves with fixed exchange rates and US Dollar borrowings. When the music stopped, there weren’t enough chairs for everyone to sit down, and we experienced the “Asian Contagion.”
Now, corporate junk bond debt is surging. Since the Financial Crisis, the level of global nonfinancial companies rated below investment grade has surged 58 percent, to the highest proportion ever. In the US, nonfinancial companies have levered themselves up to their highest level since 2010.
S&P 500 Nonfinancial Debt/Equity Ratio. Source: Bloomberg
The essential thing to know about a movable feast is that it comes up again and again, even if the specific circumstances change. Hemingway’s movable feast nourished an amazingly productive writer. Let’s hope our economy’s movable feast continues to nourish us, and we can avoid overeating.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”