A Picture is Worth a Thousand Words

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Last week in our Monthly Market Review post, there was a discussion on what if anything is gold currently saying about the market and we thought it would be worth reposting for our readers.

With that in mind, let us explore what we think is the most interesting story in September and October, namely the heated talk by many countries to move towards a new global currency. There are two charts we are presenting below, which depict an interesting tale. For Chart 1, the yellow line represents calendar year closes for a company’s common stock (left axis) while the pink represents the ratio of its total debt to revenues each year (right axis) for the past 10 years. Can you guess which entity Chart 1 represents?

Notice how this company dramatically increased its leverage relative to what it was capable of producing and selling in 10 years’ time. Clearly this was an untenable position, although it did last quite long. In the end, the company’s share price dropped to below $1 and it declared bankruptcy. This firm is General Motors (GM). (GM Financial’s debt is excluded from its total debt displayed in the chart. Total debt is defined as short-term debt, long-term debt, and other liabilities.)

Let us examine another chart.

In Chart 2, the green line depicts prices (left axis), while the blue line captures debt to revenue (right axis), during a time horizon of 40 years. Notice how Chart 2 looks a lot like Chart 1? Prices (green line) have been falling consistently over the 40-year time span, while leverage continued to climb. How sustainable is this entity’s position? Would you be a buyer or seller? Can you guess the entity Chart 2 represents? Answer: The United States. Specifically, the green line represents the Yen/USD exchange rates, and the blue line represents total federal debt to GDP. Chart 2 depicts a steady decline of the US dollar against the Japanese Yen since 1970, accompanied by a consistent increase of our country’s leverage. As a nation we have been borrowing more and more to finance our government’s consumption needs. With our total federal debt to GDP ratio expected to exceed 90% in the near future, unless our trajectory changes significantly the question is when a currency crisis will hit our shores, not if.

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