Stock Shock: Why The Market Is In Trouble

Gyrations in the stock market have zapped investors this year with more than $1 trillion in losses. The financial earthquake has been blamed on slowing growth in China, tumbling oil prices, global monetary policies and an anemic world economy.

The market bloodbath is a grim reminder of the worst financial meltdown in the country's history: the stock crash of 1929.  In that epic collapse, investors lost $25 billion, which is about $319 billion in today's dollars. There are some similarities in the genesis of today's market slump and 1929.

Historians finger the rapid growth in bank credit and loans in the 1920's as one of the causes of the cataclysmic market destruction.  Likewise, most of today's market woes can be traced to the mushrooming debt and riptide of borrowing that followed the 2007 financial train wreck.

In the aftermath of massive Wall Street bank bailouts, central government planners worldwide began lowering interest rates, stoking a credit boom.  By the middle of last year, total global debt for corporations, governments and households topped a mind-boggling $199 trillion dollars.

The figure comes from the McKinsey Global Institute, which has written extensively about the debt issue.  The debt works out to $27,500 for every man, woman, and child on planet Earth.

Just since the fiasco in 2007, total debt has zoomed up $57 trillion.  It is no coincidence that China, the world's No. 2 economy now experiencing a slump, has nearly quadrupled its debt in the last eight years, borrowing $28.2 trillion.  It's economic growth has been built on a shaky credit foundation.

During that same time frame, the U.S. federal debt has nearly doubled under President Obama. When the president leaves office next year, the nation's debt is expected to hover near $20 trillion. America had a national debt of $10.6 trillion when he entered the Oval Office in January of 2009.

Debt is not necessarily bad.  However, in this case, most of the government borrowing has not been invested in infrastructure or other economic levers.  Instead, the credit has been used to fund bloated social entitlement programs in many countries, including the U.S., or to pay for deficit spending.

As a result of the debt orgy, many countries, especially emerging nations, have few options to jump start their sagging economies. Moody's Investor Service has sounded the alarm about risks for worldwide economic malaise because central banks have run out of schemes to reverse the course.

Meanwhile, low interest rates have made stocks more attractive, leading to over exuberance in the market which has pumped up company valuations beyond reality.  High-tech stocks have reached bubble-bursting levels. Despite several market corrections, extraordinary valuations persist.

In China, the worst of all scenarios shredded its stock market.  Many Chinese, enamored with soaring stock prices at home, borrowed billions of dollars to invest in their market.  As stocks tanked, investors suddenly had their loans called, further exacerbating a sell-off as happened in 1929.

During this credit binge, global corporations fed at the debt trough, too. Corporations owe about $56 trillion of the $199 trillion in global debt. Experts at Standard and Poor's Rating Services are forecasting another $1 trillion in corporate debt will be added by 2019.

Like governments, corporate debt can produce growth if it is invested in people and assets.  However, since 2007 many firms used low rates to refinance high-interest debt.  Others have repurchased their own stock. In a single month last year, U.S. firms acquired a record $104 billion of company stock.

These buybacks are a sign corporate America believes it can get a better return on company stock instead of investing money in research, in expanding markets or in the development of new products. By not investing in growth, companies are short-changing future prospects.  

These maneuvers are at least partly to blame for the lack of revenue growth at many firms.  Last year, companies in the Standard and Poor's 500 index experienced a 3.4 percent annual revenue decline. That has fueled layoffs, operational cutbacks and asset sales aimed at trimming costs.

Some corporations have used their inflated stock prices to buy or merge with other firms. In 2015, global companies racked up nearly $5 trillion in deals, according to data from Thomson Reuters, making it a record-breaking year.  Corporate acquisitions rose 42 percent from 2014.

While this has some economic benefit, most of the transactions have ended with corporate downsizing, reductions in expenses and transfers of operations overseas to take advantage of lower business tax rates. Mergers often foreshadow the acquiring firm's lack of organic revenue growth.

During the borrowing spree, households in every country have siphoned off their share of money by raising credit card debt, refinancing homes and taking out loans for new automobiles.  Total global household debt stands at $40 trillion of which the U.S. accounts for $11.9 trillion.

Debt has proliferated in this country because the cost-of-living has outpaced wage growth.  In the last 12 years, wages have risen 20 percent, while living expenses have shot up 29 percent.  Today many households are borrowing just to keep their heads above water instead of making major purchases.

Consumer spending, which accounts for 70 per cent of the economy, grew less than one per cent in 2014, when compared to 2008. That helps explain why the nation has not reached the three-percent threshold of GDP growth in ten years, the longest sustained under performance since the 1930's.

The skyrocketing debt has saddled nations, corporations and households with a financial burden that threatens the future.  It's a damn shame that not a single presidential candidate in either party has made this issue a central focus of his or her campaign.