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Private sector debt is the key variable to watch in this cycle.

 Credit is available at rates that imply no particular risk of default, and very little risk of recession. 

 In both the euro zone and the US, high-yield bonds are looking misnamed. After a brief and sharp rise last year, their spreads over equivalent five-year government bonds are right back to a level that suggests all is quiet

The parallels with the GFC, which began in 2007 as credit markets that had long been absurdly overvaluing corporate and mortgage-backed credit began to crack, are obvious. 

Credit market might just conceivably have it right. Memories of the GFC are still fresh. People keep making the same mistakes, but it’s rare to repeat a mistake quite this big quite this quickly. 

It’s hard to deny that the massive expansion in the money supply changes things. It’s arguably the key factor in causing inflation to ignite again; but it also helps to explain why there is so little financial distress. 

How has Italy managed to survive the biggest energy crisis in Europe’s history, the fastest ECB tightening cycle on record and the departure of Draghi, all in less than a year? The answer is simple: Italy and Greece have the lowest private sector debt in the developed world; Sweden has the highest.

Sweden’s government debt is only 40% of GDP yet its economy is the weakest in Europe; Greek government debt is the highest in Europe yet its economy is the strongest. 

Private sector debt is the key variable to watch in this cycle. 

John Authers Bloomberg 6 mars 2023


M10 and the house prices


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