Thursday, July 23, 2009

Speaking of Debt

Speaking of debt: DEBT, DEBT, DEBT Consumer debt, bank debt, mortgage debt, government debt are at levels we have never seen before, even in relation to GDP, with perhaps the only time we were close being during World War II ((at least in terms of public sector debt). This is a major problem!

“The Entitled Society”-- pretty amazing. I suspect many older Americans are so fearful of this nuveaux moral fabric, this complacency, this by definition “We are the United States, of course everything will be fine” attitude. In a society where consumer spending accounts for 70% of economic growth, one can see just how vital a healthy and willing consumer is to the system. Unfortunately, the consumer spending numbers that we are using as our ‘normal’ reflect one off-deviations from the drivers of such spending, namely job and income growth. They stand belly out, belt unbuckled, after home equity loans, signature loans, car loans, mortgages, all of it. As the consumer continues to nurse its hangover and realign its balance sheet, consumer spending will remain soft, slowly contracting back to a new normal level that more properly corresponds to income.

Unfortunately, what policy makers do not seem to understand, is that you can throw a bunch of money at banks to help their balance sheets, you can line the pockets of every federal agency as we saw with the Omnibus spending bill, but ultimately, you cannot make people spend money if prudence is dictating them otherwise. There is a larger paradigm shift going on here. Consumer attitudes have been dramatically changing, rather quickly I might add. And perhaps rightly so, as the government attempts to essentially fix a problem of too much credit and debt by creating and encouraging its continued expansion. Fortunately, consumers appear wiser this time around and its one of the behavioral adjustments that the government has NOT taken into account as it projects its 3.8% domestic GDP growth rate for 2010 and its 4.5% average growth rate for the following 8 years. I am quite confident that GDP estimates will be ‘shockingly’ downgraded next year as this understanding sets in, and in turn, the budgetary shortfall will be exacerbated as revenues will obviously also fall short of expectations. As a matter of fact, I don’t think we will have to wait that long. I am hearing mumblings of an economic revision to the downside as early as mid-August, thereby raising the numerator (deficits and ultimately debt) and lowering the denominator (GDP) in the all import DEBT TO GDP RATIO. This is going to be a real problem, causing all sorts of what I shall call “new math” arising and it’s not going to be pretty. While I remain somewhat optimistic that the market may see another sizeable rally after some retest of a higher level than the March lows this summer, it is a rally that will run into a brick wall in the early part of next year at the latest, and may very well not materialize at all depending on how more recent action unfolds. The only one ‘surprised’ by the announcement will be the President himself, and his Congress, and the people on CNBC, and a lot of people that do not take the time to read alternative media like The Midnight Rambler. Worse, those surprised will endure a beating in the second half of 2010 tantamount to what they just went through in 2008 (though in Obama’s case, that’s not quite true, as 2008 was a great year for the man, and 2010 should mark the beginning of his political demise). I can’t remember who said it, but the saying goes like this. “It’s not the first loss of 50% that truly wipes out investors, it’s the second.” I suspect there will be a time late this summer when I will recommend buying stocks, but never forget, that is only if they substantially sell off from here, and that it will probably be the last good rally for the next five years (but who knows really, maybe a latent computer bides its time!), a rally to be sold aggressively at its conclusion. But we will talk about this more in the August newsletter. Should the S&P hit 750-800 or so before you hear from me again, please know that I will be buying commodities, Technology, banks, whatever and anything for the final hurrah.

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