World drowning in debt

THE spring of 2018 is starting to feel a bit like that of a decade ago on the eve of the financial crisis. On the surface all looks swell, even if the azaleas are delayed by a prolonged Washington cold spell.

Economic output is powering ahead and that allows the optimists to keep the upper hand. In 2008 the collapse and rescue of Bear Stearns was a straw in the wind largely ignored.

This time around the phoney trade war between the US and China, the prospect of a return to higher and more normal interest rates and geopolitical tensions are seen as big risks.

When the going is good financial markets keep on doing their thing and tend to ignore reality. The International Monetary Fund’s global fiscal and stability reports suggest how dangerous that could be.

Global debt levels are startling at £115trillion, or 225pc of total world output. In the advanced countries the debt-to-GDP level has reached 105pc, which makes the UK, at 86.3pc according to the IMF’s fiscal monitor, look almost respectable.

In emerging markets and developing nations debt-to-GDP levels are at the same levels as those which reduced economies to rubble in the 1980s, requiring rescue by creditors and debt relief for the poorest.

Distortions caused by a decade of superlow interest rates are coming home to roost. In 2011, as the world emerged from the financial crisis, the total market capitalisation or value of US shares represented 95pc of gross domestic product, a figure which soared to 155pc earlier this year.

A surge in financing for financial speculation, private equity buyouts and debt-laden bids such as Melrose for GKN has sent global leveraged loans soaring to £554bn, up from the high of £536bn in 2007.

Financial institutions have taken advantage of low rates and easy money to double their borrowing to £700bn. In addition, the financial world has added new products such as the Vix indexes intended to reduce, rather than increase, volatility. The mysterious world of crypto-currencies adds to the known-unknowns.

Bubbles don’t normally burst spontaneously. They need to be pricked. Interest rate rises may seem inoffensive coming from a low base but a doubling, tripling or more of borrowing costs could cause mayhem.

When investors as canny as buyout king Carl Icahn start to cash out – he has sold equity stakes valued at £5bn in the last weeks – one becomes nervous. It may be time to press the airbag release button.

Retail therapy

SHOULD we stop panicking about the impact of shrinking household incomes on the retail sector?

UK consumer prices in the UK are moderating with an increase of 2.5pc last month and are being outpaced by average wages climbing 2.8pc. That could lead to an adjustment in the outlook for consumer spending and growth.

But it hasn’t proved enough to save David Atkins’ big idea of a merger between luxury shopping centre owner Hammerson and more downmarket Intu, owner of the Trafford Centre.

It was expected that, with the departure off the scene of French interloper Klepierre, that Hammerson and its advisers would try to sweeten the Intu merger by leaving something on the table for investors.

Shareholders are less than impressed, so Hammerson has walked away leaving Intu nursing its wounds.

Takeover rules mean that investors will still get the chance to vote but that is a bit academic. There will be some shareholders who argue that Hammerson should have taken the cash and headed for the exit.

Egg all over the face for Atkins, who will have to demonstrate fast that Hammerson has the skills to remove a chunk of the share price discount to net asset value.

Good luck with that.

Big yellow

WHILE on shopping, the world’s biggest retailer Walmart (owner of Asda in Britain) is seeking to upgrade its online challenge.

So far it has moved 3.6pc of sales online and claims 100m unique users.

It wants to divorce the website from the no-frills, warehouse image of stores.

Walmart’s bold blue logo is being shrunk and replaced by a shining yellow ‘spark’.

Pages are to be decluttered and among other things there will be an elegant ‘curated’ furniture offer.

Very classy.