Debt is Good?
Pfäffikon SZ, Switzerland – Where there is debt, there are also assets. The structurally higher level of prosperity should justify high debt. A higher level of savings would logically pave the way for higher debt. More debt would lead to prosperity is the idea. Additionally, in several cases debt is advantageous. In short; Debt is good and attractive.
Intelligent
That debt would be good is a strange thought is my opinion. By many, debt is considered intelligent because assets would be more profitable. In some cases, this reasoning is correct, but we find ourselves in a special time. Money is cheap and, therefore, entering into debt seems attractive. The “first level thinker” tries to put themselves into as many debts as possible, because it costs little. However, there is a problem. When one enters into debt, it buys ownership in return. Since money is (too) cheap, possession has become too expensive.
In other words; when the historic debt bubble bursts, the most logical scenario is that possessions acquired too expensive will decline strongly in value. This does not outweigh the acquired —more or less— free cash. Also, there is still another problem. In many cases, fiscally seen, one is put with their back against the wall by entering into debt. I suspect that the governments’ aim is to put you in a difficult position, but that is another story. Freedom of movement is crucial in an environment surrounded by historically stretched parameters that have never been the case before.
Evaporate
A further consideration is that the debt one has entered into evaporates difficulty. That is because inflation is extremely low and there may be deflation. Indeed, authorities change the parameters continuously to make you believe there is a good inflation. You can better take the juggling with supposedly official figures with a grain of salt. The masses must be kept in check, and figures and graphics are very helpful tools for this.
Fortunately, I am also sometimes meeting hard-working Dutch citizens with a good job and no debt. I am honestly surprised —despite the crazy Dutch tax system— how fast someone with a good job can build up a stocked savings account. The advantage is that this category sooner or later will create a unique investment opportunity, where they can attract undervalued investments without debt. Debt in combination with too expensive possessions can never compete with cheap money.
The idea that debt would be good is, therefore, simplistic. Debt can sometimes be attractive if, for example, undervalued assets may be acquired and the ‘margin of safety‘ is maintained. However, by the insane policies of central bankers, many investment categories are completely beaten off balance and became too expensive. This is treacherous, and there is no space for constellation with (too) high debts.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.
