Record Government Debt & Low to Negative Interest Rates Challenge Global Financial Stability [2019]

Record Government Debt & Low to Negative Interest Rates Challenge Global Financial Stability [2019]

stability of the global financial system. Do the Fed and other central banks have enough
ammunition left to fight the next recession? Former IMF head John Lipsky and veteran global
economist Nick Sargen respond next on Consuelo Mack WEALTHTRACK. Hello and welcome to this edition of WEALTHTRACK,
I’m Consuelo Mack. How stable is the world financial system? A decade ago in the midst of the global financial
crisis it appeared to be on the brink of destruction. Massive and unprecedented monetary stimulus
by central banks and fiscal stimulus by governments stabilized financial markets and supported
banks and businesses. There was a huge unwinding of debt in the
financial, corporate and household sectors. Fast forward and the U.S. which was the epicenter
of the financial crisis has led the world out of it. Since 2009, we have experienced the longest
bull market in our history and the longest economic expansion. Why then is there a sense of unease? The IMF in its recent world economic outlook
report calls this a delicate year for the global economy citing escalating trade tensions,
particularly between the U.S. and china, a slowdown in china’s economy, the unresolved
challenge of Brexit, weak industrial production and investment in many developed and emerging
market economies and growing sovereign debt, to name a few. And the IMF points out that a worsening of
any of these downside risks “would take place at a time when conventional monetary
and fiscal space is limited as a policy response.” How limited is the policy response and what’s
the outlook for global growth? Few are better equipped to provide answers
than this week’s guests. John Lipsky is distinguished scholar at the
Henry A. Kissinger Center for Global Affairs at Johns Hopkins University School of Advanced
International Studies, as well as Senior Fellow at its Foreign Policy Institute. Prior to that he served a five year term as
the International Monetary Fund’s First Deputy Managing Director as well as being
it’s acting Managing Director in 2011. He holds several other leadership positions
at prestigious organizations including Vice Chair of both the National Bureau of Economic
Research and the Center for Global Development. He received a PhD in Economics from Stanford
University. As did his close friend Nick Sargen, an international
economist turned global investment strategist. Sargen is now Chief Economist at Western and
Southern Financial Group and Senior Investment Advisor at its wealth management arm, Fort
Washington Investment Advisors where he had been its Chief Investment Officer until his
retirement. Sargen is the author of several books including
“Global Shocks: An Investment Guide For Turbulent Markets” and most recently “Investing
in the Trump Era: How Economic Policies Impact Financial Markets”. I began our discussion by asking them for
their assessment of the stability of the global financial system. JOHN LIPSKY: Seems to me that the global financial
system is in much better shape than it was a decade ago, before we went into the crisis,
for a number of structural reasons. Most important is the banking system has much
more capital around the world than before. Backstop mechanisms like the European Stability
Mechanism is now in place to provide funding on an emergency basis that didn’t exist before. And many of the most egregious sources of
leverage have been eliminated or put under much stricter regulation. Derivative markets have been placed under
counter party structures. All of that should work; which is not to say
there couldn’t be problems, but it wouldn’t come from the same sources as before. CONSUELO MACK: Nick, what’s your assessment
of the global financial stability? NICK SARGEN: Oh, I would agree 100 percent
with John. And for me, the most important of all the
factors cited is just the higher capitalization of the financial institutions. I think that was the biggest risk factor then. What I would say, though, Consuelo, is while
the financial system looks better, so what would you say is, though there are always
risks out there, have been what I see that troubles me is what if something goes wrong,
what do the central banks today do when in Europe, interest rates are zero to negative? In the United States, interest rates very
low by historic standards. So, if something were to go wrong, they can
do quantitative easing, but there’s a debate about how effective that is. So to me, that’s my biggest worry. CONSUELO MACK: What about the central banks,
and what about the fact that in fact, that they really haven’t withdrawn that much quantitative
easing? And that interest rates are so low, and negative
in Europe, as Nick just said? Is that a problem? JOHN LIPSKY: Potentially. In other words, could central banks provide
substantial support to the financial system if there were new troubles? There I think the answer is yes. Could they provide broader support for the
economy? That’s less clear. They would have to undertake some innovative,
new measures to get that done. On the fiscal side, the general feeling is
that budgets don’t have room for maneuver. But of course, that’s not necessarily true
everywhere. Some European countries have substantial space
if they wanted to increase their fiscal spending. CONSUELO MACK: For instance? JOHN LIPSKY: Germany. CONSUELO MACK: Germany. JOHN LIPSKY: Or just as a for instance. CONSUELO MACK: Right, right. JOHN LIPSKY: Just by chance. But in general, I’m sure this time around,
if there were a new downturn that called for new measures, it would be on the fiscal side
much more than on the monetary side. CONSUELO MACK: So, let’s talk about the
reasons to be more confident, and do you agree, Nick, that global growth is picking up? NICK SARGEN: I would say I was uncertain at
the beginning of the year, but I’d say from March into April, we’re starting to see
more encouraging developments. And I think I’d flag China is where I’m
seeing the clearest evidence. The U.S. feeling a lot better with the jobs
report that came out in March being solid. But there are other weak spots. Europe is, in my view, going nowhere fast. And so, I don’t see yet the sign of a complete
global turn. CONSUELO MACK: And one of the things that
we’ve talked about in the past is the fact that there seems to be a divergence in the
markets. And that the stock market has been very bullish
about growth, and the bond market with interest rates so low has been signaling more caution. So which market, Nick, should we believe? NICK SARGEN: Well, for a while I was unsure. What I would say right now is I think that
if China does continue this upwards improvement, that the stock markets probably have more
room to run. The however, in my view, is that there’s still
challenges ahead, and I think the big question in the U.S. is, is there going to be a major
profit slowdown continuing or not? CONSUELO MACK: How much of a concern is that? NICK SARGEN: Well, I think it’s happening
as we speak, and some of it is purely the impact of the corporate tax cuts that were
enacted, that went into effect last year. CONSUELO MACK: Which boosted the bottom line,
right? NICK SARGEN: Boosted, and the estimates are
last year we had S&P profit growth up over 20 percent. The ballpark estimates are maybe eight percentage
points of that was due to the one-off effect of the tax rate cut. So that goes away, and then you say: well,
are we left with low double-digit growth? And the answer is: no; and so, what I’m
seeing is weak first quarter, maybe second quarter, but does it revive or not? It comes down to does the global economy revive? And I think it will be better, but I think
this is a year of single-digit profit growth, not double-digit, no. CONSUELO MACK: Do you want to add to that,
John? JOHN LIPSKY: Well, let’s look at the following:
it’s hard to believe that investors who have bid up equity prices recently, expect to see
the continuation of that kind of performance into the future. As if they’ve reassessed the outlook, decided
it’s more favorable than they had previously, and priced accordingly. But there’s every reason, I think, that we
will see much slower profits growth certainly in the U.S., and that will have an effect
on markets. What is interesting is to ask: okay, now let’s
look at bond markets. And you have an unprecedented situation in
which in Germany and Japan, ten-year government bond yields are at zero or below zero. People are paying the government to take their
money off their hands for ten years. We’ve never seen anything quite like this
before. And yields here are low, but they’re even
lower elsewhere. Is that a mistake, or is that saying that
there’s something going to go wrong with the economy, that the stock market doesn’t see? Well, not so clear, number one. Central banks have been interfering by buying
up a lot of long-term debt. CONSUELO MACK: Right, so isn’t it a function
of what the central banks have been doing? JOHN LIPSKY: That must be part of it. Part of it is a recognition that the economies
are continuing to move along quite nicely, really. But with no sign of any acceleration of inflation. And that would be the principle risk. CONSUELO MACK: Right, and so if inflation
accelerates, then the central banks have to respond, right? Because that’s their mandate, by raising interest
rates and that could be a problem for economic recovery. JOHN LIPSKY: Exactly. CONSUELO MACK: Right. JOHN LIPSKY: And there are two other factors
that may be long term. Demographics. As the investment populace gets older, maybe
they get more risk-averse, especially in the wake of the crisis. So, they’re much more willing to hold onto
low-risk assets than they were previously. So, you get this combination of good performance
on the equity side, and very good performance on the debt side, not signaling that there’s
a contradiction. CONSUELO MACK: Right. You two just returned from separate trips
to China, and China is a major driver of global growth. And China has had, I think, 70-plus easing
moves, in various aspects of their economy, over the last year. And it seems to be working, so what’s your
assessment, Nick, of China? What the outlook is for China. NICK SARGEN: Well, the thing that was most
evident, because I was at a conference a year ago when the trade war was just beginning,
and I came away with the Chinese business community was very, very worried about a possible
trade war at that time. And that was the beginnings of the slowdown
in China. So, ten months later I returned, and I felt
that the mood was a bit more relaxed, and part of that being the anticipation that we’re
closer to a trade agreement. So, I think that was the biggest takeaway. I think that the second takeaway is, as you
said, there was both expansionary fiscal policies, and more latitude on lending. And so that may have given the economy a boost. But I think that the longer-term issue for
China is they’ve taken on so much debt since the financial crisis that is this the sort
of thing that gives you a quick injection, and things look better for a couple of quarters? But are you dealing with the longer-term issues? And I’m in the camp that China’s economy
on a trend is going to continue to slow, because I think it’s inevitable too, that the returns
on investment are declining because of the nature of where they’ve been investing, in
state-owned enterprises. CONSUELO MACK: So, John, what is your assessment
of the state of China’s economy and its growth? JOHN LIPSKY: Well for sure, the latest numbers
have been quite upbeat, actually. And my sense of the mood when I was there,
was that folks weren’t acting like they were worried or in the midst of a big slowdown. Now, one of the reasons in addition to the
fears of a potential trade fight that was dampening expectations, also the government
had responded to this very rapid growth in credit by squeezing the shadow banking system. What they found was, of course, that the shadow
banking system was providing credit to the private sector. The state-owned enterprises borrow from the
big state banks. So, what you were seeing was a real slowdown
in the most productive parts of the economy. CONSUELO MACK: Private sector. JOHN LIPSKY: They’re not stupid, they recognized
this and took some action. And that’s why among other things their stimulus,
both in terms of credit and in terms of public spending, have had an impact. But there was another aspect of importance. Many had concluded that, in spite of earlier
promises to move toward a more market-oriented economy, that in fact they were coming back
to more state dominance. CONSUELO MACK: Right. JOHN LIPSKY: In the recent National Development
Forum in Beijing, which is a very important annual venue for talking to their foreign
investors, they were at great pains to say: no, no, no, we are going forward with important
market-opening measures, including dropping the need for joint venture majority Chinese
ownership. For example, in the financial sector, allowing
foreign firms in. Now are they going to carry through? Are they going to provide not just market
ownership, but market access by reducing regulatory barriers? This is going to be, I think, a very important
determinant of the longer-term outlook for the Chinese economy, that we all know is going
to have to deal with a slowing growth in the labor force, and actual eventual decline in
the labor force because of their demographics. CONSUELO MACK: Demographics. JOHN LIPSKY: That will tend to slow growth
in any case, if not growth per capita. So hopeful signs, but let’s see if there’s
carry-through. CONSUELO MACK: There’s an area of the world
that has not been in the headlines that much that you think is extremely critical, and
that is Latin America. Why are you so concerned about Latin America? Why should we be paying more attention to
it? JOHN LIPSKY: Well, let’s say why should
we pay attention? Because there are risks, but there are real
opportunities. The risks are obvious. Venezuela is a disaster on a historic scale. Produced more refugees than Syria. It’s unimaginable that this has continued
to fester. And there won’t be an easy cure, the disaster
is so deep and it will affect their neighbors, just at a time when the new government in
Brazil, for all its political oddities, is espousing a really seriously reformist, pro-market
open economy model for Brazil, and in Argentina there’s a pro-market open economy government
trying to introduce important reforms in two of the big, well Brazil, by far the biggest
economy in the region. CONSUELO MACK: Right, the exact opposite of
what had happened in Venezuela, where the government took over everything and has destroyed
the economy. JOHN LIPSKY: Exactly. CONSUELO MACK Right. JOHN LIPSKY: So, we quietly on the west coast;
Peru, Chile, Colombia, things are going well. And have been going well. If you add Brazil and Argentina, if they were
to succeed, it’s an opportunity that we shouldn’t ignore. We should be talking again about a free trade
agreement for the Americas. This is right in our backyard. NAFTA, in my mind, has been a success. We should look to a free trade agreement in
the Americas. It takes good luck in Argentina and Brazil,
and a solution in Venezuela. But we shouldn’t overlook it. CONSUELO MACK: Yes. Let me ask you about the markets. Because in the U.S., we last year entered
the longest bull market in history. We are approaching the longest economic recovery
in U.S. history as well. What do you each think about the sustainability
of the U.S. recovery and also about the bull market? John, why not start with you? JOHN LIPSKY: Okay. Right now, the expansion appears to be sustainable. There are two very good signs. One, if we look at the jobless claims number,
they are at the lowest since the ’60s. And they haven’t been bouncing around; they’ve
been quite steady, signifying a very solid labor market, which indicates it should boost
incomes and consumer confidence. The second, related fact, is, if you remember
in the recession, the so-called participation rate was falling, and those folks who were
telling you about secular stagnation were telling you that that participation rate would
never recover. Well, it’s recovering, suggesting that there’s
maybe more room to run in the labor sector despite the very low unemployment rate. So, both of those are good signs for a still-solid
consumer outlook. And if that’s the case, then it’s hard to
get too downbeat about the U.S. outlook. CONSUELO MACK: All right. Market. Bull market, longevity, concerns. NICK SARGEN: Well yes, I would say that the
bull market goes with the U.S. and the global economy. And again, what I look for on the economy
front is “do I see major signs of imbalances”? And the answer right now is I don’t. CONSUELO MACK: You don’t. NICK SARGEN: So, the second issue, though,
is that we learned from the global financial crisis is your first question on yes, it is
the financial system, are there cracks in it? And again, I agree that it’s in somewhat better
shape. So, then that leads to the question: well,
does this mean we’re just on autopilot? And the answer, I think, is I think the market
may be starting to think about that. In fact, I’ve been reading something. But I would say there’s always something to
worry about. And I’m convinced it may not be anything
that we’re talking about right now. So, my bottom line is I think that there’s
more legs to this, but at the same time I would just caution people, it’s been one of
the strongest starts to any year; that’s not going to continue. If it did, that’s when I would worry. But we came off the heels of one of the worst
selloffs of any quarter, so it was extraordinary volatility, but I do think that there’s more
room to go, but at a more gradual pace. CONSUELO MACK: Investment strategy, Nick,
what are you recommending, what would you recommend for individual investors? NICK SARGEN: Consuelo, I think that the reality
for most investors who don’t want to take a lot of risk is they just want to earn some
nice income. And the issue that I now see is, for a while,
I was actually encouraged that U.S. bond yields were rising gradually, thinking: okay, here’s
a haven for investors to go back into, maybe is the bond market, to earn some interest
income. And now after the declining yields, you say:
what now? And so, the approach that we’ve been discussing
at our firm is that we feel there’s need for income-oriented funds. Now, the biggest challenge, though, that the
investor runs into is that they want yield-yield-yield in the stock market. Where are they? Well, utilities, real estate, maybe financials. So, the problem that we see is that those
funds may not be properly diversified. So, our idea is to be looking out for vehicles
that can give you dividend yields, let’s say ballpark, three-and-a-half, four percent. That meets my objective. But I’m more properly diversified. So that if the market were to sell off, I’m
not taking as much risk as more concentrated funds. CONSUELO MACK: So as a core approach, so that
would be the one investment for a long-term diversified portfolio, would be then a diversified
portfolio of income-yielding stocks? NICK SARGEN: Yes. Income-yielding stocks, and we might even
have some bonds in that, as well, to just give us proper balance. Because we feel that investors now want at
least to earn some positive interest income or dividend, but at the same time they don’t
want to be taking the risk that they could see another decline in their stock portfolio
of 25 percent. So, we want to come up with a strategy that
gives you more downside protection. CONSUELO MACK: One investment for long-term
diversified portfolio, John; you are not an investment advisor, but last year when you
were on at this time, you recommended dollar-denominated assets. And in fact, in 2018, the dollar was up, most
markets were down, including the U.S. market, but it was down less than just about anything
else, and U.S. Treasuries did very well. Do you want to pick a region or a country
or that you think will do well? JOHN LIPSKY: Yes, I’ll be happy to give
it a shot, but first I think it’s worth keeping in mind both here and abroad, if you say what
would be the big risk? We could talk about policy risks, the trade
war, this, that; but clearly given the level of indebtedness, inflation is key. If inflation were to flare up against all
expectations, we’d be in a very different spot. But right now, we’re confident that that’s
not the case. But if we were wrong, that would be to be
really wrong. CONSUELO MACK: So corporate debt and government
debt levels are extremely high in this country, and in other countries around the world as
well. JOHN LIPSKY: Exactly, but debt service burdens
are very low because rates are so low. So that’s why even though the stock of debt
is high, the cost of carrying that debt is not. Now, for where to look over the coming year? Well, you probably want to look at the area
that has been the most castigated, and I would say that’s Europe. Brexit, political problems, Jean Le Drian,
the tragedy with the burning of Notre Dame, Italy, Spain; everywhere you look there are
political problems, economic underperformance, and the markets have looked at Europe askance. And it’s easy to see policy improvements,
but also that a lot of the underlying economic weakness may have been temporary. Partly in Germany and elsewhere with the problems
in the auto sector that are probably temporary. China, which is this earlier slowdown in China
now going away. If; if the Europeans can come across with
some reasonable political developments and we can solve Brexit in a satisfying way, then
I think that’s where there could be a substantial change in market attitudes. Wouldn’t want to over-exaggerate, but right
now the markets look on Europe and say: Oh, every kind of problem you can imagine. That could change. CONSUELO MACK: Right. So, we’re going to leave it there. John Lipsky, thank you so much for joining
us. JOHN LIPSKY: So, thank you. CONSUELO MACK: With your good friend and former
colleague, Nick Sargen. We loved having you both on. It’s great, thank you. JOHN LIPSKY: Oh, it was a pleasure. NICK SARGEN: Thank you. JOHN LIPSKY: Thank you. CONSUELO MACK: At the close of every WEALTHTRACK
we try to give you one suggestion to help you build and protect your wealth over the
long term. This week’s action point is: Consider putting
a small amount of your emerging markets allocation into an established Latin American fund. As John Lipsky told us there are two economic
extremes represented in our southern hemisphere. The unmitigated and almost unprecedented failure
of Venezuela’s economy caused by the terrible dictatorial socialist policies of Hugo Chavez
and his successor. That is a situation only for experienced distress
investors. But luckily as Lipsky mentioned there are
several countries with healthy open market economies. Chile with its now long standing free market
economy, built by Chilean economists who were students of Milton Friedman’s at the University
Of Chicago. Colombia which has adopted similar free market
reforms, and Peru. In the possible turnaround category is Brazil,
by far the largest and wealthiest of the countries whose new government is attempting serious
pension reforms to get itself out from under a crippling financial burden. Considering that Brazil dominates Latin American
indexes with a 60% weighting and Mexico with around 25% we decided to look at actively
managed funds that don’t hug the benchmark. One that comes up on several searches is the
T. Rowe Price Latin American Fund which is a Morningstar Bronze medalist, the only medalist
in the Latin American stock category so designated because of its experienced team and sound
and distinctive growth discipline. We and our guests are always on the lookout
for under-represented, unpopular and thus frequently undervalued areas to diversify
into. These volatile Latin American markets check
all three boxes. Next week how to save yourself from disastrous
mistakes in retirement. Award winning financial planner Mark Cortazzo
has the solvency saving advice. To see this program again and other WEALTHTRACK
interviews please go to our website Also feel free to reach out to us on Facebook,
Twitter and our YouTube channel. Thank you for watching. Have a wonderful Mother’s Day weekend and
make the week ahead a profitable and a productive one.


  1. slovokia says:

    Central bank activism will ultimately lead to a situation where because government debt to gdp is so high, monetary policy will enter regime of fiscal dominance. Therefore central banks will not be able to keep inflation low in the future if populist governments run high deficits.

  2. Lorraine Wang says:

    Argentina is going well? Seriously?…Credit spread exploded 2 weeks ago…

  3. David Kahl says:

    There is chaos under the heavens and the situation is excellent. I bought a Europe fund about 25 years ago when the EU was just forming; It always under performed and I don't see that trend ending any time soon.

  4. Dennis Simmons says:

    All rose colored glasses here my friends. They don't see an imbalance in the markets? The FOMC is screaming 2% real growth + 2% inflation. Corporations are hesitant to invest in production and continue share buybacks at record levels. Unemployment below natural levels indicating potential inflation. Stock investors continuing to bid stocks skywards. Long term bonds a fraction of a percent above the inflation rate. Yikes….nothing but imbalance in my eyes. I was shocked Consuelo Mack didn't press the matter a bit more, especially since she seemed astonished by some of their answers. Oh well…either way…the question posed in her opening was not answered. The real question to these guys should have been, "Long term treasuries really softened the blow during the 2008 stock market meltdown, but is there much wiggle room left for yields to drop during the next recession? I would love to hear their response. Pin them down next time Mrs. Consuelo!

  5. Rob Bird says:

    Is it wrong that I hum the Wealthtrack song 🤔?

  6. Rain Maker says:

    Great interview!

  7. Nun Ya says:


  8. 77magicbus says:

    Wow ! Fantastic program. Succinctly moves right along and stays on topic. Great job Consuelo.

  9. John Smith says:

    There's been an inversion in the yield curve. Pretty much every time that occurs, a recession has followed. Also to note, recessions often happen in the final year of a US president's tenure. Now, I don't know why that is exactly. Maybe the Fed is planning the whole thing, or maybe it's just by that time, all of a president's stimulus spending has run dry. Either way, I couldn't possibly see the bull market going for another 4 years, so I think it would make sense that we enter a recession soon, possibly by the 3rd quarter.

  10. Ramzi Batarseh says:

    The "no inflation" premise that most experts base their opinions must be a myth. Anyone who pays rent, or gets health care, or goes to school can tell you that inflation is real and prevalent. Maybe TVs and cars haven't gone up much in price, but everything else is way more expensive now than 10, 20 years. Back to the point, those experts therefore make their conclusions on a faulty premise, and as such their opinions can be misleading.

  11. Scott Dennen says:

    Why didn't you bother ask about the effect of the global growth on the environment? I guess business profits are doing fine if you never have to capitalize any the true costs. None of you will be around to deal the aftermath so who cares, am I right? Fuck it, let's pour more gas on this bonfire and see how high we can get these flames. Since I have my head in the sand, I can't feel that my ass is on fire

  12. Radnally says:

    Longest expansion yet. So, a recession cant be that far off.

  13. Chess Dad says:

    I don’t put a lot of weight on unemployment numbers. That figure seems to be manipulated significantly. Working 20 hours per week at minimum wage. No you are not unemployed. And how often have we seen a market crash when shortly before everyone was giddy with the stock market. I am skeptical of the current situation.

  14. AntiSocial Atheist says:

    Why is everyone so uneasy? I'll give you a hint. It's orange, speaks like a teenager on meth and has an IQ of 60. It rhymes with dump

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