Although the stock market is at an all-time high, and the mainstream media continues to report that the economy is healthy, the reality is that the recent stock rally has been induced by $850 billion of money printing by the Federal Reserve, and the real economy is actually showing definitive signs of weakness. The weakness of the real economy is leading to increasing loan defaults and delinquencies in the United States and China, and this is essentially an economic time bomb as will be explored in this article. Ultimately, Bitcoin (BTC) stands to become a top alternative investment and safe haven asset when this time bomb finally detonates.
The first sign that something is wrong is that although the Federal Reserve cut the Fed Funds Rate three times this summer, interest rates for consumer credit cards has risen to 17%, the highest level in decades. This is simultaneous with a surge in auto loan interest rates from 3% at the beginning of 2018 to 5% currently, with auto loan rates from finance companies spiking to 6.5%.
It seems that credit card and auto loan interest rates are rising due to a surge in consumer defaults and delinquencies, which is a stronger force than falling Central Bank interest rates.
The rate of credit cards which are more than 90 days delinquent is now 12%, up from 8% in 2014. The rate of auto loans which are more than 90 days delinquent is now 8.5%, up from 7% in 2015. In response to this banks are letting consumers take out loans for longer time periods so that the payments are smaller, but this is causing the sizes of loans to increase, ultimately increasing the risk of loan defaults.
The credit card delinquency rate for major banks is steadily rising, while delinquencies for lesser banks has spiked to 6%, which is the all-time high. Indeed, smaller banks would be the first to experience a crisis induced by loan defaults, since smaller banks tend to take on loans that have greater risk.
Meanwhile in China, there has been a surge in companies defaulting on corporate bonds in 2018 and 2019, with 2019 being the new record with $18.7 billion of defaults. This includes the state-owned company Tewoo Group, which experienced the first high-profile default in China in decades.
The Tewoo Group default indicates that the Central Bank of China can no longer inject enough money to prevent banks and corporations from defaulting, even if they are state-owned. This has caused a top adviser to the China Central Bank to warn of a default chain reaction, a chain reaction which could take down China’s $4.4 trillion onshore bond market, and threaten the entire $40 trillion Chinese financial sector.
Bringing this information full circle, defaults and delinquencies in the United States and China are steadily increasing. In the United States no high-profile corporations or banks have defaulted thus far, likely due to Federal Reserve money printing and the fact that the USD is the world’s reserve currency, meaning the USD can be printed en masse without devaluing the USD that much, at least for now. However, Central Bank money printing in China is reaching the limit of its efficacy, and high-profile corporations and banks are no longer guaranteed a bailout from the Central Bank.
A default chain reaction works like this: If loan defaults and delinquencies become severe enough then small banks and corporations can go bankrupt, leading to a chain reaction of bigger banks and corporations going bankrupt, which then leads to a stock market collapse and a severe devaluation of individual and corporate portfolios worldwide.
It appears this process is already underway in the United States with consumer credit and auto loan default and delinquency rates increasing, which may eventually threaten the solvency of small banks and corporations. China may already be in the more advanced stages of this process, with Tewoo Group defaulting and multiple government takeovers of small Chinese banks due to bank runs.
Further, the economies of China and the United States are highly interconnected, with Chinese assets widely held by corporations and banks in the United States, so if a loan default chain reaction occurs in China it will probably quickly spread to the United States.
The ultimate result of a loan default chain reaction is crashing stock values as banks and corporations go bankrupt en masse, with each bankruptcy damaging the portfolios of other banks and corporations due to the highly interconnected nature of the economy.
If this were to happen, then Bitcoin (BTC) would become a solid alternative investment opportunity and safe haven asset. Essentially, investors worldwide would be losing money on stocks and securities backed by loans, at which point putting money into Bitcoin (BTC) would make sense, since Bitcoin’s (BTC) price is not directly connected to or backed by loan-backed securities. Therefore, if the economy was entering a serious recession due to a loan default chain reaction, Bitcoin (BTC) could rally.
As the crypto space enters 2020 traders should monitor loan default and delinquency rates worldwide, as well as news regarding the insolvency of banks and corporations, since current data is indicating that a loan default chain reaction is slowly building worldwide. It seems a loan default event which ‘breaks the camel’s back’ could come at any time, and if this happens it could spark the next big Bitcoin rally.