Global debt has tripled since the turn of the Century:

The good news is that US GDP has doubled in that same time frame.  Further, most of the debt growth happened up to 2012 whereas much of the economic growth happened from 2010 to the present.  Consequently, US Debt/GDP has actually declined slightly in the past 5 years.  This is not the case in emerging markets with China leading the debt binge:

As you can see, most of the debt growth since the crisis era has been concentrated in government and corporate debt.  Consumer debt growth, with the exception of student loan debt, which has grown by about 440% since 2004, has been relatively subdued.  Finally, and most interesting to us, we note that residential mortgage debt growth has been minimal, though it has picked up modestly of late.  Conversely, commercial borrowing has expanded much more rapidly at about a 7-8% annual clip over the past five years.  Multifamily is the fastest growing sector of commercial real estate debt at just over 10% annual growth.  

Conclusions:  No deleveraging has happened globally.  To the contrary, debt as a percentage of GDP is hovering at all time highs of about 325%.  This will not be sustainable in a non-zero interest rate environment.  The next crisis will bring greatest pain in the sovereign and corporate sectors where debt levels are least sustainable.  Multi-family is probably most vulnerable in the real estate sector...and it is hard to predict how the student loan complex will work its way through the next downturn without some form of debt forgiveness (not currently contemplated) or government bail out.  

In spite of the Trump-induced fireworks that happened in the last 45 days of the year, we found nothing exciting in the private loan space.  Sellers were pretty proud on pricing and 'motivated' borrowers simply didn't materialize as we had hoped.  We have a number of opportunities in the pipeline, but wouldn't describe any of them as sure-thing closings.  In our view, it remains a better time to play defense than offense.  Hence, we expect to remain very picky in adding new assets and relatively small and nimble in terms of AUM until the risk-reward equation looks more appealing.

While we try to do a quarterly update of what is happening in our world, I must confess there is just not much to say!  Markets have been sclerotic at best in recent months and expected rates of return are paltry.  We continue to mine for nuggets of out-sized opportunity, though we are seeing a higher and higher percentage of proposals in land development and/or big, bloated, aging properties that signify to us we are nearing a peak.  We are generally optimistic that year ends bring opportunity as people seek to clear the books before December 31.  Add the elections into the mix as well as perhaps some modest Fed Activity and we could finally see a bit more uncertainty and volatility.  These would be welcome for a business that requires some distress in order to reach its hurdle rate of return.

The old adage, "Don't fight the Fed,"  is perhaps even more poignant today than in decades past in the sense that the QE machine, currency creation, debt cancellation, etc. is not confined to the Fed but is a global phenomenon.  We have wondered here for 3 years or more how the continued expansion of global debt could ultimately play out any way other than badly.  While we still think badly is perhaps the most likely scenario, it may be that the CBs will have the luxury of continued balance sheet expansion/money printing without runaway inflation.  They may even expand their balance sheets more aggressively in the future to fund large-scale infrastructure spending, most likely in the US.  If this is possible without crippling inflation and/or a currency collapse - more of a fiat money collapse vs. hard assets than a dollar collapse - asset prices would likely continue to levitate at current substantially overvalued levels, more jobs will be created to increase the wages of many, and there is no real day of reckoning as long as the Fed or other CBs hold the debt.  It all seems almost too good to be true, which is why we are skeptical it goes quite so smoothly. Nonetheless, the global 'Fed' is quite determined to do "whatever it takes" to create some inflation, and they seem to have the authority and independence to do it.  Calling the collapse of an entire regime is very difficult to do...until after the fact when it seems so obvious in hindsight.

From the Fund's perspective, the 'prolonged levitation' scenario, i.e. more of the same, is probably the best case scenario.  In this environment, asset prices remain inflated, so our collateral position is solid, but we are earning an enormously outsized coupon while we wait.  In fact, a high-inflation environment is not necessarily bad either as our collateral position remains healthy and we get to reset rates higher regularly to keep up with accelerating inflation.  This is also likely in an environment where other financial assets are feeling pain.  Higher implied rates of return generally mean lower prices.  The toughest environment for TFP is a deflationary environment where borrowers are defaulting and collateral is going down by 30% plus.  We might have thought this was the most likely scenario given the enormous global debt overhang.  However, the central bankers seem pretty determined to continue QE indefinitely, which may go wrong but probably in a direction that doesn't really hurt TFP too much.