Debt doesn’t matter — right up until it does.
So goes the chestnut.
In actual practice, however, it’s much worse: Increasing debt tends to make equity valuations go up right until it matters, then it makes them crash.
There is exactly zero attention being paid to this. But the truth of it is found in every recent, and in fact all the nasty historical drawdowns in the market. Let’s just go through a few of the really bad ones, specifically:
1873
1929
2000 and
2008
All of them shared the same basic paradigm.
In 1873 it was long-term railroad debt centered on the premise of silver mining. When that blew up it put the US into Depression and destroyed market valuations in a form and fashion deep enough that it became known as the “Long Depression”; a moniker and derisive standard that stood unchallenged until the 1930s.
In 1929 of course it was both stock market margin debt along with real estate, much of it in Florida, that led to the 1929 crash and the government’s intervention led to the 1930s Great Depression.
This post was published at Market-Ticker on 2017-09-29.
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