The Worst Global Recession Is Here

Everybody's talking about global recession. The World Bank, the IMF, there are a lot of questions in these reports and in this review that they issued today. The United States plans to impose fresh sanctions against Russia and China.

What's up, guys? It's Graham here. So, in the middle of a recession warning, the worst inverted yield curve in 41 years, and plummeting real estate values, we have one topic that almost no one is talking about, and that's the fact that 80 trillion dollars of hidden debt was just discovered. That's in a quote: “huge missing and growing."

Now, just for context, 80 trillion dollars is an amount that's twice the size of the U.S. stock market. It's almost three times larger than the national debt, and it's six times larger than the entire mortgage market. According to researchers, it's a global blind spot that has the potential to wreak havoc if and when something were to happen.

So, Kevin, just how massive this is combined with an outright imminent global recession? We should talk about exactly what's happening, what this means for you, whether or not this is actually cause for any concern, and finally what you could do about it to make money.

On this episode of Millennials are moving back in with their parents, which just so happens to come at the same time that Meme stock Mania may finally be over. Are the two correlated? I'll let you decide. Although, before we start, it's recently come to my attention that Warren Buffett highly recommends that you smash the like button and subscribe if you haven't done that already.

Okay, that's a fake headline, but it would help out the channel tremendously and is the thank you for doing that. Here's a picture of a blue leg permit crab. So, thank you so much, and now let's begin.

All right, so to start, this entire 80 trillion dollar underground debt market all begins with what's called foreign exchange swaps, or I guess more simply put, a currency swap. See, here's the thing: even though the US dollar is held as the world's reserve currency, the banking system to a large degree is interconnected.

For instance, companies in the U.S. might want to do business overseas. European banks might want to borrow money to fund a project in California. And I want to mention my free newsletter down below in the description because I'm able to cover a lot of these topics in a lot more detail.

So, what do companies do if they want to fund a project outside of their own country? Well, if they're in the U.S., they could just take the US dollar and exchange that into something else, but that exposes them to exchange rate risk, especially if the US dollar increases or loses its value.

The second option is that they can also just borrow the money that they need in another country, but those interest rates might not be as low as what they have here. So, a currency swap is usually the best choice when this happens. A U.S. company could borrow money in US dollars, swap currency with a foreign company who needs those US dollars, and a middleman facilitates the transaction to ensure that the process goes smoothly.

Essentially, this allows companies and banks to finance their borrowing at favorable interest rates without having to worry about borrowing in one currency and then paying it back with another. However, the issue today is that the 80 trillion dollars of currency swaps are not required to be reported on company balance sheets.

With so much money potentially at risk, there could be some serious complications throughout our entire economy. So, this is what's happening. As Bloomberg explains, this shadow banking system could all begin with the U.S. treasury market. These are loans made to the U.S. government, and in exchange for giving them your money, you get paid back anywhere between four to five percent in interest, depending on the term.

But here's where the 80 trillion dollars of hidden debt comes in. Other countries see the USD dollar as a safe haven asset, and so when the Federal Reserve raises interest rates faster than the rest of the world, other countries begin to buy up those U.S. treasuries as a hedge against their own currency. And so, currency swaps are often used.

Now, in theory, these loans should be fully backed because it would be no different than me giving you ten dollars American and you giving me back fourteen Canadian. In that situation, we both hold the exact same amount of value, and we each promise to pay each other back at the end of the term.

Although the trouble comes when short-term borrowing is used to buy long-term assets, and by the time those short-term obligations come due, there might not be enough dollars available to pay them back. Listen, if that sounds extremely confusing, here's a very simple example.

Let's assume that someone's selling you the rights to buy a property that pays five percent interest for two years, and they only want 10 silver coins as payment. But you don't have 10 silver coins; you only have ten dollars in cash. In that case, you go to the Silver Pawn Shop and you lend your ten dollars in exchange for 10 silver coins, with the promise that you'll give back those 10 silver coins exactly one year later.

At that moment, you haven't gained or lost any money; you still have ten dollars worth of silver. The pawn shop still has your ten dollars worth of cash, and as long as each of you repay your debts, you'll have the exact same amount that you started with.

Now, that's definitely a very oversimplified example for the sake of getting a complex topic across, but given just how much money is at stake, the real question becomes: is this something we should be concerned about, especially when the IIF says that a recession is imminent?

Well, the answer is it depends. If everything goes perfectly and everybody repays back their debts or rolls them over into the future, then nothing is going to happen and everything will continue on as usual. But with the US dollar making up 88% of those transactions, that might cause other countries to print more of their own currency to swap, thereby causing even higher overseas inflation and causing demand for the dollar to rise even more.

Or even worse, that would require other countries to sell their assets to pay for more dollars, which would also crash the market. But biggest issue isn't so much what we already know about, it's what we don't know about.

Since none of this is required to be reported on company balance sheets, there's an estimated 30 trillion dollars of swaps that have not been accounted for until just recently. On top of that, it's also reported that economists still don't know exactly how these debts are spread among different kinds of shadow banks, so the problem could be a lot worse than what we expect.

Bloomberg also makes the comparison that low interest rates have caused the global economy to take on excess leverage for higher returns, and now the borrowing costs are going back up. We could only hope that they've utilized that borrowing responsibly.

Thankfully, for most of us in the U.S., these currency swaps are mainly happening overseas, so it's not like your local bank has 50 trillion dollars in shadow debt they're not telling you about. For almost everybody watching this, this is going to have no direct impact on you.

But the biggest risk is that the rise of the US dollar could continue to hamper worldwide growth, and if the dollar is in short supply, that increases the chances of a liquidity crisis similar to what happened in 2008 and 2020, or basically central banks and policymakers have no idea how to plan for such a risk when they have no idea just how big the risk really is.

But there is one risk they are banking on, and that would be a global recession. That's because the International Institute of Finance went on record to say that worldwide growth in 2023 is expected to be weaker than the global financial crisis of 2009, mainly triggered by the contractions throughout Russia and Ukraine.

As they explain, the severity of the 2023 global recession will all come down to one thing: the cost of energy. Now, as a counter to this, beginning last Monday, Russian oil has been sanctioned with the 60 price cap throughout Europe, the U.S., UK, Japan, Canada, and Australia, meaning the maximum they're able to pay is sixty dollars a barrel in an effort to throttle funding to Russia.

The goal is that this would impact Russia's ability to fund the war while at the same time ensuring that the world does not cut itself off from natural resources, which would skyrocket the price that much higher than it already has.

Though in terms of whether or not this would actually be effective, the answer is we have no idea. On the one hand, Russia responded by saying that they will not abide by the measure, even if they have to cut production, and they're already reportedly selling oil for sixty dollars a barrel.

So, we don't know if this is going to have much of an impact, but it does seem as though this was done with balancing global energy needs in mind, and there's nothing that says this price cap can't be adjusted again in the future.

Beyond that, China’s facing its own collapse while manufacturing orders declined by 40 percent, while lockdowns are still in effect. As a result, many factories will temporarily shut down for two weeks in observance of their New Year. Thankfully, though, it does seem as though their restrictions are beginning to ease up, and for the entire world, this could help dampen rising prices that were caused by supply chain delays.

So in terms of what you could actually do with this information, one possible option is probably not something that you would expect, and that would be bonds. See, what many people forget is that stocks and real estate don't just continually move higher every single year, and for people who want to keep cash on the sidelines, there haven't really been many great options until recently.

With rates having risen at their fastest pace ever in history, studies show that government bonds have had the highest performance across the asset class, averaging as much as 6.6 percent throughout the last four recessions.

Even though this still pales in comparison to the return of stocks following a bear market, if you have cash in the sidelines that you know you're not going to be investing in the short term, then these bonds could give you some additional upside and might even go up in value if you're holding on to them during a time that the FED decreases their rates.

In fact, one graph shows that on average in the first half of a recession, bonds typically go up by almost five percent during a time where equities declined by 26 percent. This goes to show you that bonds can have a place in your portfolio as a cushion for volatility, and throughout times of uncertainty, they could remain a relatively stable investment.

So, as far as my overall thoughts as far as currency swaps are concerned, even though it's an incredibly complicated topic, all you need to know is that most likely everything is fine unless we've seen economic disaster similar to 2008 or 2020, in which case currency swaps are probably going to be the least of our concerns.

But in all seriousness, even though it's likely not going to have much of an impact for most people here in the U.S., it does point to an extremely large gray area of the market that does need a lot more transparency, that way the central banks will know exactly what to look out for and how to prepare in case something were to happen.

As far as everything else though, to be honest, we're probably going to see a lot more volatility than usual leading up to the next rate hike on December 14th, and a lot of that will depend on the inflation report that comes out the day before on December 13th.

If inflation comes in under expectations, will the FED raise rates by 50 basis points? Then we could very well see a stock market rally through the end of the year. But if that doesn't happen, then I guess you should just add my newsletter down below in the description because I'm able to cover a lot of these topics in more detail than I could talk about here on YouTube.

So, with that said, guys, thank you so much for watching. As always, feel free to add me on Instagram, and don't forget our sponsor, public.com, has a bonus for you down below in the description. They're a great stock trading app with a whole bunch of resources available for even more research on the market.

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