Connect with us

Central Banks

The 5 Biggest Market Risks That Billionaires are Hedging Against

Published

on

If you’ve studied the history of markets, you know that sentiment can turn on a dime.

Whether it is an unexpected wake-up call like the collapse of Lehman Brothers, or simply the popping of a bubble that’s blown too big, the tides can shift in a matter of hours or days.

No one knows this better than the world’s most elite investors – and that’s why billionaires like Warren Buffett, Ray Dalio, Bill Gross, Paul Tudor Jones II, and Carl Icahn take the necessary precautions available to protect themselves from these big and unexpected market swings.

5 Risks That Keep Billionaires Up at Night

Today’s infographic comes to us from Sprott Physical Bullion Trusts and it highlights some of the potential market risks that could move markets, as well as how these elite investors are hedging to protect their fortunes.

The 5 Biggest Market Risks That Billionaire Investors are Hedging Against

While these are all market risks that billionaires are concerned about, it’s worth mentioning that these kinds of events are almost impossible to predict or forecast.

Despite the unlikelihood of them occurring, they all have the potential to impact markets – and that’s why elite investors are always active in hedging their investments.

A Note on Net Worth

Why are billionaires so concerned – after all, don’t they have lots of cash to protect themselves?

It’s worth noting that on a relative basis, billionaires often aren’t very liquid at all. In fact, the majority of their net worth is usually tied up in business interests or other investments, and the value of these assets fluctuate with the market.

That means a big market movement could wipe out millions or billions of dollars in the span of hours. For an extreme example of this, just look at Mark Zuckerberg, who saw his net worth plunge $6 billion in just one day in the wake of his company’s most recent privacy crisis.

The 5 Big Market Risks

Here are the risks keeping the world’s most elite investors up at night:

1. The Return of Inflation
Have central banks mastered monetary policy- or is there a chance that inflation could come back with a vengeance? After trending down for decades, billionaire Carl Icahn says that creeping inflation could lead to higher interest rates, which he thinks would be “difficult to deal with for the market”.

2. Record High Debt
The most recent number for global debt is at $233 trillion, and about $63 trillion of that is central government debt.

Bill Gross, the “Bond King”, says that our system is dependent on leverage, and the critical values that affect this are debt levels, availability, and the cost of leverage. He said in a recent interview that “When one or more of these factors deteriorates, the probability of the model’s success and stability go down”.

3. Bond Market Worries
Last year, 84% of investors said that the corporate bond market was overvalued – and 82% said that the government bond market was overvalued.

In a recent interview, hedge fund billionaire Paul Tudor Jones II predicted a price plunge, saying that “Bonds are the most expensive they’ve ever been by virtually any metric. They’re overvalued and over-owned.”

4. Geopolitical Black Swans
Elite investors continue to worry about geopolitical surprises that could impact markets, such as a trade war with China. We looked at this broad topic in depth in our previous infographic on geopolitical black swans.

5. Overzealous Central Banks
Lastly, many world-class investors are also concerned about the unintended aftereffects of massive central bank programs in recent years. With $13 trillion in total QE pumped into global markets since 2008, investors are worried about how much room that central banks have left to maneuver in a situation where the central bank “tool kit” is needed.

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
Comments

Central Banks

The History of Interest Rates Over 670 Years

Interest rates sit near generational lows — is this the new normal, or has it been the trend all along? We show a history of interest rates in this graphic.

Published

on

The History of Interest Rates Over 670 Years

Today, we live in a low-interest-rate environment, where the cost of borrowing for governments and institutions is lower than the historical average. It is easy to see that interest rates are at generational lows, but did you know that they are also at 670-year lows?

This week’s chart outlines the interest rates attached to loans dating back to the 1350s. Take a look at the diminishing history of the cost of debt—money has never been cheaper for governments to borrow than it is today.

The Birth of an Investing Class

Trade brought many good ideas to Europe, while helping spur the Renaissance and the development of the money economy.

Key European ports and trading nations, such as the Republic of Genoa or the Netherlands during the Renaissance period, help provide a good indication of the cost of borrowing in the early history of interest rates.

The Republic of Genoa: 4-5 year Lending Rate

Genoa became a junior associate of the Spanish Empire, with Genovese bankers financing many of the Spanish crown’s foreign endeavors.

Genovese bankers provided the Spanish royal family with credit and regular income. The Spanish crown also converted unreliable shipments of New World silver into capital for further ventures through bankers in Genoa.

Dutch Perpetual Bonds

A perpetual bond is a bond with no maturity date. Investors can treat this type of bond as an equity, not as debt. Issuers pay a coupon on perpetual bonds forever, and do not have to redeem the principal—much like the dividend from a blue-chip company.

By 1640, there was so much confidence in Holland’s public debt, that it made the refinancing of outstanding debt with a much lower interest rate of 5% possible.

Dutch provincial and municipal borrowers issued three types of debt:

  1. Promissory notes (Obligatiën): Short-term debt, in the form of bearer bonds, that was readily negotiable
  2. Redeemable bonds (Losrenten): Paid an annual interest to the holder, whose name appeared in a public-debt ledger until the loan was paid off
  3. Life annuities (Lijfrenten): Paid interest during the life of the buyer, where death cancels the principal

Unlike other countries where private bankers issued public debt, Holland dealt directly with prospective bondholders. They issued many bonds of small coupons that attracted small savers, like craftsmen and often women.

Rule Britannia: British Consols

In 1752, the British government converted all its outstanding debt into one bond, the Consolidated 3.5% Annuities, in order to reduce the interest rate it paid. Five years later, the annual interest rate on the stock dropped to 3%, adjusting the stock as Consolidated 3% Annuities.

The coupon rate remained at 3% until 1888, when the finance minister converted the Consolidated 3% Annuities, along with Reduced 3% Annuities (1752) and New 3% Annuities (1855), into a new bond─the 2.75% Consolidated Stock. The interest rate was further reduced to 2.5% in 1903.

Interest rates briefly went back up in 1927 when Winston Churchill issued a new government stock, the 4% Consols, as a partial refinancing of WWI war bonds.

American Ascendancy: The U.S. Treasury Notes

The United States Congress passed an act in 1870 authorizing three separate consol issues with redemption privileges after 10, 15, and 30 years. This was the beginning of what became known as Treasury Bills, the modern benchmark for interest rates.

The Great Inflation of the 1970s

In the 1970s, the global stock market was a mess. Over an 18-month period, the market lost 40% of its value. For close to a decade, few people wanted to invest in public markets. Economic growth was weak, resulting in double-digit unemployment rates.

The low interest policies of the Federal Reserve in the early ‘70s encouraged full employment, but also caused high inflation. Under new leadership, the central bank would later reverse its policies, raising interest rates to 20% in an effort to reset capitalism and encourage investment.

Looking Forward: Cheap Money

Since then, interest rates set by government debt have been rapidly declining, while the global economy has rapidly expanded. Further, financial crises have driven interest rates to just above zero in order to spur spending and investment.

It is clear that the arc of lending bends towards ever-decreasing interest rates, but how low can they go?

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Central Banks

$69 Trillion of World Debt in One Infographic

What share of government world debt does each country owe? See it all broken down in this stunning visualization.

Published

on

$69 Trillion of World Debt in One Infographic

Two decades ago, total government debt was estimated to sit at $20 trillion.

Since then, according to the latest figures by the IMF, the number has ballooned to $69.3 trillion with a debt to GDP ratio of 82% — the highest totals in human history.

Which countries owe the most money, and how do these figures compare?

The Regional Breakdown

Let’s start by looking at the continental level, to get an idea of how world debt is divided from a geographical perspective:

RegionDebt to GDPGross Debt (Millions of USD)% of Total World Debt
World81.8%$69,298100.0%
Asia and Pacific79.8%$24,12034.8%
North America100.4%$23,71034.2%
Europe74.2%$16,22523.4%
South America75.0%$2,6993.9%
Africa56.9%$1,3131.9%
Other37.1%$1,2311.8%

In absolute terms, over 90% of global debt is concentrated in North America, Asia Pacific, and Europe — meanwhile, regions like Africa, South America, and other account for less than 10%.

This is not surprising, since advanced economies hold most of the world’s debt (about 75.4%), while emerging or developing economies hold the rest.

World Debt by Country

Now let’s look at individual countries, according to data released by the IMF in October 2019.

It’s worth mentioning that the following numbers are representative of 2018 data, and that for a tiny subset of countries (i.e. Syria) we used the latest available numbers as an estimate.

RankCountryDebt to GDPGross Debt ($B)% of World Total
#1🇺🇸 United States104.3%$21,46531.0%
#2🇯🇵 Japan237.1%$11,78817.0%
#3🇨🇳 China, People's Republic of50.6%$6,7649.8%
#4🇮🇹 Italy132.2%$2,7444.0%
#5🇫🇷 France98.4%$2,7363.9%
#6🇬🇧 United Kingdom86.8%$2,4553.5%
#7🇩🇪 Germany61.7%$2,4383.5%
#8🇮🇳 India68.1%$1,8512.7%
#9🇧🇷 Brazil87.9%$1,6422.4%
#10🇨🇦 Canada89.9%$1,5402.2%
#11🇪🇸 Spain97.1%$1,3862.0%
#12🇲🇽 Mexico53.6%$6550.9%
#13🇰🇷 Korea, Republic of37.9%$6520.9%
#14🇦🇺 Australia41.4%$5880.8%
#15🇧🇪 Belgium102.0%$5430.8%
#16Netherlands52.4%$4790.7%
#17Argentina86.1%$4470.6%
#18Singapore113.6%$4140.6%
#19Greece184.9%$4040.6%
#20Austria73.8%$3370.5%
#21Indonesia30.1%$3080.4%
#22Portugal120.1%$2890.4%
#23Poland48.9%$2860.4%
#24Switzerland40.5%$2860.4%
#25Ireland63.7%$2440.4%
#26Russian Federation14.6%$2420.3%
#27Turkey30.2%$2330.3%
#28Egypt92.7%$2310.3%
#29Pakistan71.7%$2260.3%
#30Israel60.8%$2250.3%
#31Sweden38.5%$2140.3%
#32Thailand42.1%$2130.3%
#33South Africa56.7%$2090.3%
#34Taiwan Province of China35.1%$2070.3%
#35Malaysia55.6%$1990.3%
#36Venezuela182.4%$1800.3%
#37Norway40.0%$1740.3%
#38Colombia52.2%$1730.2%
#39Finland59.3%$1630.2%
#40Saudi Arabia19.0%$1490.2%
#41Iran32.2%$1440.2%
#42Vietnam55.6%$1340.2%
#43Philippines38.9%$1290.2%
#44Denmark34.3%$1210.2%
#45Hungary70.8%$1140.2%
#46Iraq49.3%$1110.2%
#47Nigeria27.3%$1090.2%
#48Bangladesh34.0%$98.10.14%
#49Angola89.0%$94.30.14%
#50Qatar48.6%$93.00.13%
#51Romania36.7%$87.90.13%
#52Lebanon151.0%$85.10.12%
#53Czech Republic32.6%$79.90.12%
#54United Arab Emirates19.1%$79.10.11%
#55Ukraine60.2%$78.80.11%
#56Morocco65.0%$77.00.11%
#57Chile25.6%$76.30.11%
#58Sri Lanka83.3%$74.10.11%
#59Sudan212.1%$72.70.10%
#60Algeria38.3%$66.50.10%
#61New Zealand29.8%$60.50.09%
#62Peru26.1%$58.80.08%
#63Puerto Rico55.5%$56.10.08%
#64Kenya60.1%$52.80.08%
#65Slovak Republic48.9%$52.10.08%
#66Ecuador45.8%$49.60.07%
#67Ethiopia61.0%$49.00.07%
#68Croatia74.6%$45.40.07%
#69Dominican Republic50.5%$43.20.06%
#70Oman53.4%$42.30.06%
#71Jordan94.4%$39.90.06%
#72Ghana59.3%$38.90.06%
#73Slovenia70.4%$38.10.05%
#74Uruguay63.5%$37.90.05%
#75Kazakhstan21.0%$36.30.05%
#76Bahrain94.7%$35.70.05%
#77Costa Rica53.5%$32.30.05%
#78Tunisia77.0%$30.70.04%
#79Belarus47.8%$28.50.04%
#80Serbia54.5%$27.50.04%
#81Myanmar38.2%$26.20.04%
#82Panama39.5%$25.70.04%
#83Cyprus102.5%$25.10.04%
#84Côte d'Ivoire53.2%$22.90.03%
#85Bolivia53.8%$21.80.03%
#86Tanzania37.3%$21.20.03%
#87Zambia78.1%$20.90.03%
#88Kuwait14.7%$20.80.03%
#89Guatemala24.7%$19.40.03%
#90Lithuania34.2%$18.20.03%
#91Syria30.0%$18.00.03%
#92Yemen64.8%$17.90.03%
#93El Salvador67.1%$17.50.03%
#94Cameroon39.1%$15.10.02%
#95Luxembourg21.4%$14.90.02%
#96Jamaica94.4%$14.60.02%
#97Senegal61.6%$14.50.02%
#98Mozambique99.8%$14.40.02%
#99Bulgaria20.4%$13.30.02%
#100Latvia35.9%$12.50.02%
#101Turkmenistan29.1%$11.90.02%
#102Uganda41.4%$11.60.02%
#103Albania69.9%$10.50.02%
#104Uzbekistan20.6%$10.40.02%
#105Lao P.D.R.57.2%$10.40.01%
#106Gabon60.7%$10.20.01%
#107Congo, Republic of87.8%$10.20.01%
#108Trinidad and Tobago45.1%$10.20.01%
#109Iceland37.6%$9.80.01%
#110Honduras40.2%$9.60.01%
#111Mauritius66.2%$9.40.01%
#112Paraguay21.5%$9.00.01%
#113Azerbaijan18.8%$8.80.01%
#114Nepal30.2%$8.80.01%
#115Papua New Guinea35.5%$8.20.01%
#116Bahamas, The63.3%$7.90.01%
#117Zimbabwe37.1%$7.80.01%
#118Georgia44.9%$7.30.01%
#119Congo, Dem. Rep. of the15.3%$7.20.01%
#120Cambodia28.6%$7.00.01%
#121Bosnia and Herzegovina34.3%$6.90.01%
#122Namibia45.8%$6.60.01%
#123Malta45.2%$6.60.01%
#124Mali37.3%$6.40.01%
#125Barbados125.7%$6.40.01%
#126Armenia51.3%$6.40.01%
#127Burkina Faso42.9%$6.10.01%
#128Equatorial Guinea43.3%$5.90.01%
#129Benin41.0%$5.90.01%
#130Madagascar45.7%$5.50.01%
#131Chad48.3%$5.30.01%
#132North Macedonia40.5%$5.10.01%
#133Niger53.8%$5.00.01%
#134Nicaragua37.2%$4.90.01%
#135Guinea38.2%$4.60.01%
#136Kyrgyz Republic56.0%$4.50.01%
#137Mauritania82.9%$4.30.01%
#138Malawi62.9%$4.30.01%
#139Togo76.2%$4.10.01%
#140Montenegro72.6%$4.00.01%
#141Rwanda40.7%$3.90.01%
#142Maldives68.0%$3.60.01%
#143Tajikistan47.9%$3.60.01%
#144Eritrea174.3%$3.50.01%
#145Moldova29.7%$3.40.00%
#146Haiti33.3%$3.20.00%
#147Bhutan102.4%$2.60.00%
#148Sierra Leone63.0%$2.60.00%
#149Estonia8.3%$2.60.00%
#150Fiji46.2%$2.60.00%
#151Suriname72.8%$2.50.00%
#152Cabo Verde124.5%$2.50.00%
#153Aruba84.5%$2.40.00%
#154Botswana12.1%$2.30.00%
#155Guyana52.9%$2.10.00%
#156Burundi58.4%$2.00.00%
#157South Sudan, Republic of42.2%$1.90.00%
#158Belize95.2%$1.80.00%
#159Eswatini35.2%$1.70.00%
#160Antigua and Barbuda89.5%$1.40.00%
#161Gambia, The86.6%$1.40.00%
#162Djibouti48.0%$1.40.00%
#163Afghanistan6.9%$1.40.00%
#164Kosovo17.0%$1.40.00%
#165Liberia39.9%$1.30.00%
#166San Marino77.9%$1.30.00%
#167Saint Lucia64.3%$1.20.00%
#168Lesotho44.5%$1.20.00%
#169Central African Republic49.9%$1.10.00%
#170Guinea-Bissau64.3%$0.90.00%
#171Seychelles56.9%$0.90.00%
#172Grenada63.5%$0.80.00%
#173Saint Vincent and the Grenadines74.5%$0.60.00%
#174Saint Kitts and Nevis60.5%$0.60.00%
#175Vanuatu51.4%$0.50.00%
#176Samoa50.3%$0.40.00%
#177Dominica74.1%$0.40.00%
#178Hong Kong SAR0.1%$0.40.00%
#179Brunei Darussalam2.6%$0.40.00%
#180São Tomé and Príncipe74.5%$0.30.00%
#181Comoros21.0%$0.20.00%
#182Timor-Leste6.1%$0.20.00%
#183Solomon Islands9.4%$0.10.00%
#184Micronesia, Fed. States of20.3%$0.10.00%
#185Nauru58.3%$0.10.00%
#186Marshall Islands25.2%$0.10.00%
#187Kiribati20.6%$0.00.00%
#188Tuvalu28.1%$0.00.00%

In absolute terms, the most indebted nation is the United States, which has a gross debt of $21.5 trillion according to the IMF as of 2018.

If you’re looking for a more precise figure for 2019, the U.S. government’s “Debt to the Penny” dataset puts the amount owing to exactly $23,015,089,744,090.63 as of November 12, 2019.

Of course, the U.S. is also the world’s largest economy in nominal terms, putting the debt to GDP ratio at 104.3%

Other stand outs from the list above include Japan, which has the highest debt to GDP ratio (237.1%), and China , which has increased government debt by almost $2 trillion in just the last two years. Meanwhile, the European economies of Italy and Belgium check the box as other large debtors with ratios topping 100% debt to GDP.

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
Get more Visual Capitalist with VC+

Subscribe

Join the 130,000+ subscribers who receive our daily email

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Popular