Stewart Cowley: the bond market assassin

Experienced assassins get really close to their victims.

The inexperienced start with long-range sniping. In fact the more experienced you are the closer you get to your victim, I am told.

In the same way really experienced fund managers don’t distance themselves from their subject by surrounding themselves with masses of information in order to make their decisions. They get really close by looking at a few important things. So let’s get close to our particular study; western capitalism.

Debt accumulation

If you reach for your copy of Das Kapital by Karl Marx, you’d find an interesting exposition of capitalism.

Marx held that all profits were and are a function of debt accumulation. Since the cost of goods is the sum of wages and materials and equipment (mainly the former), to make profits capitalists are compelled to borrow to increase production, while workers have to borrow money in order to afford what their employers produce. In other words, all profits are financed by debt expansion.

In this sense capitalism is synonymous with debt. It needs it, it craves it, it covets it and for its survival capitalism needs credit growth. 

Consumerism based on credit has become a fact of our lives in the past 30 years in a way that was unfamiliar to previous generations. Since consumption is the largest part of any western GDP calculation, it is understandable why anyone seeking ‘growth’ at any price, would want to see the re-ignition of the credit cycle.

Equally, it should not be a surprise to anyone that as finance has supplanted manufacturing in our societies, growth has increasingly been propelled by illusory debt accumulation and financial engineering.

The banks

So what better place to look to find the clues to where we are than the state of the banks?

Specifically the size of their loan books or rather their annualised growth rate. If you do this for the largest institutions in the US, UK and Europe it becomes pretty obvious where we are in the cycle of capitalism (see graph below).