December 2, 2022

Census Bureau Report Portrays Destruction Of The American Dream

It Already Is A Depression For Many

The latest report from the Census Bureau on income, poverty and health insurance coverage portrays a darkening economic picture for millions of Americans.  Incomes and living standards fell without regard to geography, race or work profession.  For many, the Census report only confirms the destruction of the “American Dream” of economic advancement.

  • For 2008 real median household income declined 3.6% to $50,303.
  • The official poverty rate in 2008 increased to 13.2% from 12.5% the previous year and is the highest since 1997.   There are now 39.8  million people in poverty.  The government definition of poverty for a family of four is an income below $22,025.
  • The number of people without health insurance increased from 45.7 million to 46.3 million.  The number of people with private health insurance decreased slightly to 201 million.
  • Incomes declined across all racial groups.
  • Incomes declined in every geographic region except the Northeast where incomes remained unchanged.
  • Income inequality was unchanged in 2008 from the prior year, indicating that no income class was spared from a decline in income.

While the government is rolling out the press releases congratulating itself on an economic recovery, many Americans remain in an economic nightmare of unemployment, poverty and hopelessness.   The latest stats from the Census Bureau provide little reason for optimism since without income growth there will be no economic recovery. The latest report on the number of homeowners in foreclosure signals no recovery to date in incomes or jobs.

U.S. Foreclosure Filings Top 300,000 for Sixth Straight Month

Sept. 10 (Bloomberg) — Foreclosure filings in the U.S. exceeded 300,000 for the sixth straight month as job losses that boosted the unemployment rate to a 26-year high left many homeowners unable to keep up with their mortgage payments.

A total of 358,471 properties received a default or auction notice or were seized last month, according to data provider RealtyTrac Inc. That’s up 18 percent from a year earlier…. One in 357 households received a filing.

Foreclosures rose from a year earlier as companies cut payrolls by 216,000 workers last month…

“The foreclosure numbers are largely unemployment related,” Davis, a former Federal Reserve Board economist, said in an interview. “As long as 15 million Americans are unemployed, record foreclosures will continue.”

With the real world unemployment rate approaching 20%, the government’s loan modification schemes merely delay inevitable foreclosure for many homeowners – without income any monthly payment is too high.  Nor is unemployment the only cause of foreclosures.  For those who still have jobs but are barely getting by, a decrease in income can easily lead to mortgage default.

We Need Income – Not More Debt

cbearnings

While the divorced from reality politicians in Washington decide on what new deficit financed spending program they should enact next, they are missing the big picture.  Our future long term national prosperity will be based on promoting free enterprise job creation – something that does not appear to be on the agenda in Washington.

Extended Unemployment Benefits Make Little Sense

Do Extended Benefits Reduce Job Seeker’s Motivation?

Excluding the depression of the 1930’s we are fast approaching a new official high in unemployment.  During the depths of the last worst recession of 1981, unemployment exceeded 10% vs 9.4% today.  If we include marginally attached and involuntarily part time workers in the unemployment numbers, the current unemployment rate exceeds 16%.

In response to the high level of unemployment and the difficulty of obtaining employment, Congress has enacted legislation that allows the unemployed in 24 states to collect up to 79 weeks of unemployment benefits.   The other states allow unemployment benefits  from 46 to 72 weeks.  In more normal economic times, the limit on unemployment benefits was usually up to 26 weeks.

Washington legislators are now proposing another extension of benefits for up to another 13 weeks that would cost up to $70 billion.  The additional extension of benefits was prompted by the fact that up to 1.5 million unemployed Americans would soon be losing their unemployment checks as they reach the current payment limits.

In addition, the duration of unemployment has reached new highs not seen since record keeping began.

Duration of Unemployment

Given the unprecedented level of unemployment, the duration of unemployment and well reasoned arguments on why unemployment will continue to increase, the entire concept of unemployment benefits should be reconsidered.

Should Unemployment Benefits Be “Free”?  –  Some Alternatives

  • Is the constant extension of unemployment benefits reducing the motivation of the unemployed to seek new employment?   In the past year I have tried to hire unemployed people for an entry level position in which the starting pay was comparable to or slightly above the level of unemployment benefits the job seeker was currently receiving.  In almost every instance, the job seeker declined the job offer, preferring instead to postpone employment until benefits ran out.  I have also heard this same story from other people.  To maintain unemployment benefits, many states require that a benefit recipient contact a certain number of employers per week to seek work – how many of the unemployed merely go through the routine of seeking employment to maintain benefit payments?
  • Should the economy weaken further and job losses continue, does it make sense for Congress to constantly extend costly unemployment benefits with zero obligation from the recipient?  Bill Clinton reformed welfare by requiring benefit recipients to work.  Why not do the same with the unemployed who are receiving benefits?   Many charities, local governments, hospitals and companies  could employ additional manpower in a variety of productive endeavors.   The unemployment benefits would still be paid by the government, but the benefits would have to be earned.  From a self worth perspective, getting engaged back into the real world would benefit the unemployed as well – sure beats watching television all day.
  • Instead of spending hundreds of billions on unemployment benefits and getting nothing in return, the government could establish job training programs or put the unemployed to work on infrastructure projects that the country sorely needs.  This was done in the 1930’s with the Works Progress Administration (WPA) and the country still benefits to this day from the roads, bridges, dams and buildings that were constructed.   The preferred way to do this would be for government bureaucrats to get out of the way and contract projects to private industry.  Paying people to do nothing accomplishes nothing.

Ideally, the economy recovers and private industry rehires many of the unemployed.  Realistically, the country may face continued massive job losses or at best a slow recovery where the unemployment rate remains in the 10% plus range for an extended period of time.   Maintaining an army of paid and unemployed workers to sit idle makes no sense.

More on this topic

When The Laid-Off Are Better Off

Would it surprise you to learn that survivors can suffer just as much, if not more, than colleagues who get laid off?  “How much better off the laid-off were was stunning and shocking to us,” says Sarah Moore, a University of Puget Sound industrial psychology professor who is one of the book’s four authors. “So much of the literature talks about how dreadful unemployment is.”

The Contradiction Of Empty Homes And Rising Apartment Vacancies

A Housing Surplus

Huge increases in foreclosures have resulted in millions of homes sitting vacant as bank REO managers struggle to sell the empty homes.  Theoretically, people who have been evicted or lost their homes to foreclosures would be new renters.  Consider, however, the increase in apartment vacancies to a 22 year high:

U.S. apartment vacancies rose to their highest in 22 years in the second quarter as job losses cut tenant demand and more units came to market. Vacancies climbed to 7.5 percent from 6.1 percent a year earlier, New York-based real estate research firm Reis Inc. said today. The last time landlords had so much empty space was in 1987,

“Vacancies continued to rise despite what has traditionally been a strong leasing period for apartment properties,” said Victor Calanog, director of research at Reis.

Job losses and falling wages are shrinking the pool of potential renters, defying forecasts that prospective homebuyers would rent rather that purchase as house prices decline. The U.S. unemployment rate rose to a 26-year high in June and U.S. payrolls dropped more than forecast in June, the government said last week.

Rents paid by tenants, also known as effective rents, fell 0.9 percent from the previous quarter to $975, said Reis. Effective rents were 1.9 percent lower than a year earlier.

“New buildings coming online over 2009 and 2010 will face higher initial vacancy levels, and will work to increase the pressure on leasing managers,” Calanog said.

The brutal economic fact is that those losing their homes cannot afford to rent.  In many cases dispossessed adults are now sharing homes with children, friends or relatives.  In addition, USA Today reports  children are moving back into their parents’ homes:

Matthew Costigan is young, single and a recent college graduate.

So what does he do? He gives up his nice pad in the trendy Shadyside neighborhood of Pittsburgh and moves in with mom and dad. To his boyhood home. In the suburbs.

Costigan and many others in the most educated generation of young adults are seeking refuge under their parents’ roofs from skyrocketing housing prices, mounting college debts and a tight job market.

A survey of 2004 college graduates shows that 57% planned to move back in with their parents. MonsterTRAK, an online job site for college students and young alumni that conducted the survey, found that 50% of 2003 graduates are still living at home and 35% are still looking for work.

The Families and Work Institute for the first time asked 3,504 employed adults whether they have grown children living at home. The findings were surprising, says Ellen Galinsky, president of the New York research group. “Fully 25% of employed parents have children from 18 through 29 years of age living at home at least half of the time,” she says.

Forced by economic hardship, children are moving back in with parents and parents are moving in with their children.   Meanwhile, apartments and homes sit vacant, causing bank losses on homes and commercial loans.

Foreclosed empty homes and increasing rental vacancies are just one more sign of an over leveraged, cash poor consumer.  Forecasts predicting an economic recovery based on increased consumer spending are certain to be wrong.  Major job losses and wealth destruction of the past two years are forcing consumer to do what they must to survive.  With job losses increasing and unemployment reaching depression levels, an economic recovery remains a fantasy at this point.

Obama – 40 more years!

For all of those worried about tax increases, slow economic growth and rapidly expanding deficits, I have one word – relax.  Consider the following comments made by the President today.

Obama Says Robust Growth Will Prevent Tax Increases

June 16 (Bloomberg) — “One of the biggest variables in this whole thing is economic growth,” the president said in an interview with Bloomberg News at the White House. “If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes.”

Obama has repeatedly said he would keep his campaign pledge to cut taxes for 95 percent of working Americans while rolling back tax breaks for households making more than $250,000 a year.

The U.S. economy shrank at a 5.7 percent annual pace in the first quarter… The median forecast for growth next year is 1.8 percent, according to the survey.

Obama warned that if economic growth remains “anemic” and Congress fails to adopt his plans to hold down the cost of health care, work on alternative energy sources and improve the U.S. education system, “then we’re going to continue to have problems.”

He also repeated his promise to cut the budget deficit, forecast to hit $1.8 trillion this year, in half by the end of his first term.

“If my proposals are adopted, then not only are we cutting the deficit in half compared to where it would be if we didn’t do anything, but we’re also going to be able to raise revenue on people making over $250,000 a year in a modest way,” he said. “That helps close the deficit.”

Fiscal discipline that leads to lower budget deficits is important, Obama said, to ensure investors around the world keep buying U.S. government debt.

From warning of a “financial catastrophe” some short months ago, we are now being told that:

  1. Robust economic growth will cover government spending increases
  2. 5% of working Americans will cover the tab for the other 95%
  3. New spending on health care, education and the environment will spur economic growth
  4. Deficits will be cut in half to only $1 trillion a year
  5. Fiscal discipline will cause investors to lust after U.S. debt securities

News like this is almost enough to make one believe that the recent 40% gain in stock prices is just the beginning of  new wealth creation for investors.

Before rushing into a 100% long position with your portfolio,  consider some of the potential headwinds that the President’s magic scenario will face.

Past decades in the U.S. have been distinguished by slow economic growth (despite huge credit stimulus), stagnate or declining real incomes and a massive increase in the debt burden on every sector of the economy.   In addition, American’s have seen their major asset categories – stocks and real estate – vaporized by multi trillion dollar losses.

Median Household Incomes Fell in 94% of the States – 1999-2005.

1999-2006 Income Declines

1999-2006 Income Declines

Courtesy: mwhodges.home

Household Debt Ratio

Household Debt Ratio

Debt to National Income

Debt to National Income

Debt to National Income Ratio

Debt to National Income Ratio

Workers in Manufacturing

Workers in Manufacturing

Personal savings rate

Personal savings rate

Decline In Purchasing Power US $

Decline In Purchasing Power US $

Conclusion:

The national economic trends of past decades are:

  • Lower incomes
  • Staggering increases in debt
  • Dramatic decreases in savings
  • The destruction of our manufacturing base
  • A 90% decline in the purchasing value of our currency

If the President can reverse these trends, I say change the Constitution and give him 40 more years in office!

Tracking the Economy Through Coin Production

Economic IndicatorOne of the consequences of a recession is a decline in demand for newly minted coins. Economic activity declines and there is less demand for coins in commerce. Individuals also put long hoarded change back into circulation. Coins come out of hiding from couch cushions, penny jars, and abandoned State Quarter collections. The net result is a drop in the number of new coins produced.

This year, the United States Mint expects coin production to decline by as much as 70% from the prior year. This is on top of a 30% decline experienced for 2008.  The situation has become so severe that the US Mint had already announced that they will not mint any more nickels or dimes for the remainder of 2009.

Total US Mint Circulating Coin Production
2007 14,440,650,000
2008 10,141,580,000
2009 (through May) 1,909,400,000

As dire as the annual figures seem, the month to month indications are also pointing straight down. Since 1999, the US Mint has produced five different designs for the quarter each year, which serves to provide data points over shorter time periods. The designs are changed every 2-3 months. This year there are six designs, so the new designs are released approximately every two months. Here’s what the production totals look like for this year.

2009 Quarter Production
District of Columbia design 172,400,000
Puerto Rico design 139,200,000
Guam design 87,600,000

To put these numbers in some perspective, last year each of the five State Quarters designs had at least 400,000,000 minted with the highest total coming in at 517,600,000 for the Hawaii Quarter, which was minted during the last few months of 2008. The highest quarter production since the start of the rotating designs occurred in late 2000, when the Virginia Quarter had 1,594,616,000 coins minted.

The latest production for the Guam Quarter represents a decline of 83% from the recent Hawaii Quarter and a whopping decline of 94.5% from the peak production for the Virginia Quarter.

This was a guest post written by Michael Zielinski.

Fiscal Discipline – Endorsed By All, Practiced By None

Has anyone noticed the correlation  of “fiscal discipline” chatter to rising interest rates?  Efforts by the Fed to manipulate rates lower through the outright purchases of treasuries and mortgage securities seem to be failing as the long end of the yield curve continues to steepen.  Is the fiscal discipline talk simply an effort to calm bond investors or is the plan deeper?

Consider some recent comments by the President and the Fed Chairman.

Obama Urges Congress To Pass Law Enforcing Fiscal Discipline

(Bloomberg) — President Barack Obama said he is committed to imposing fiscal discipline on the government and called on Congress to pass a law requiring any new spending be matched by higher taxes or cuts elsewhere. Obama, in his weekly radio and Internet address, said that while his initiatives to confront the economic crisis have deepened the country’s debt,

“We need to adhere to the basic principle that new tax or entitlement policies should be paid for,” Obama said.

“We cannot sustain deficits that mortgage our children’s future, nor tolerate wasteful inefficiency,” Obama said.

Earlier this week, Obama was criticized as doing too little to confront the deficit when he ordered his Cabinet to cut $100 million out of the budget

And right on cue, Mr Bernanke followed up with  sobering remarks on the perils of deficit financing and fiscal imbalances.

Fed Chief Calls For Plan To Curb Budget Deficits

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said.

The deficit is expected to reach $1.8 trillion this year as the country spends feverishly on financial bailouts, a sweeping stimulus package, lending programs, rescues for the automobile industry and more.

Why Bernanke is Right to be Worried

Mr Bernanke states that ”even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs.”

These are strong words, and appropriately so given the worrisome fiscal outlook facing the US. By necessity, Mr Bernanke will increasingly be in the business of countering monetisation and inflation concerns.

Indeed, the markets have already fired a couple of clear warning shots in the last couple of weeks, as illustrated by recent moves in US bonds and the dollar.

It’s Your Problem, Bernanke Tells Congress

Congress and the people who elected it must decide how much government they want to afford, Bernanke said. Stating the obvious, he went on to say: “Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run.”

Unfortunately, Congress and the people have seldom gotten the balance right. We want the benefits of a large government without paying the costs, just as we wanted a loftier personal living standard than our income could support.

The current economic crisis — which demanded “strong and timely actions,” in Bernanke’s view — has accelerated the day of reckoning for our public and private debt…

Both Obama and Bernanke are intelligent men.  I doubt that either one truly believes that unlimited borrowing or printed money create enduring economic prosperity.   The bailouts, guarantees and deficit spending were necessary to prevent the economic crisis from turning into something much worse, but the cost has  accerlerated  the “day of debt reckoning”.

Now that the crisis seems contained and rates are rising,  the emphasis by both Obama and Bernanke is on ‘balancing spending with revenues”.   Since neither man  mentions reduced  spending, what exactly do they have in mind?

The way this plays out should be interesting.  The President wants his numerous costly programs implemented and Bernanke, a “student of the depression” will be loathe to endorse tax increases on a still very fragile economy.  Bernanke tells Congress that paying the bills is their problem and Obama states that new entitlements should be paid for.  So what is the solution? 

The solution is the only one it has ever been-  defer any meaningful action to the next administration, defer the unwinding of the excesses to the next business cycle, and defer  the debts to the next generation.  The “solution”  will keep on working until it doesn’t.

Hyperinflation Worries – The Next Black Swan Or A Contrary Indicator?

Inflation Concerns Increase

There has been much speculation lately about the end results of the US Government’s massive deficit spending.   Many analysts are predicting that the end result will be hyperinflation as the Fed is forced to monetize debt that the US Government is unable to borrow in the credit markets.  These concerns have already turned to reality as rates on the 10 year Government have increased sharply from approximately 2% to 3.5% since the start of the year

Always quick to response with a new product to meet investor demand, Wall Street has come up with a product to protect investors from the risk of hyperinflation.

Wall Street Journal – A hedge fund firm that reaped huge rewards betting against the market last year is about to open a fund premised on another wager: that the massive stimulus efforts of global governments will lead to hyperinflation.

The firm, Universa Investments L.P., is known for its ties to gloomy investor Nassim Nicholas Taleb, author of the 2007 bestseller “The Black Swan,” which describes the impact of extreme events on the world and financial markets.

Funds run by Universa, which is managed and owned by Mr. Taleb’s long-time collaborator Mark Spitznagel, last year gained more than 100% thanks to its bearish bets.

Unlike last year’s sudden market implosion, inflation isn’t an unimaginable event that few currently anticipate. In fact, many fear inflation right now amid government efforts to goose the economy. Universa’s bet, however, is that inflation will reach levels few expect.

The fund will also bet against Treasury bonds, which tend to weaken in inflationary environments. Last week, Treasury yields shot to their highest level since November as prices fell on inflation concerns. Oil topped $66 a barrel. Gold is creeping nearing $1,000 an ounce.

Also, some investors are worried not about inflation but about deflation and its pernicious effects were the economy to remain stalled.

David Rosenberg, chief economist at Gluskin Sheff, a Toronto wealth-management firm, believes inflation won’t take hold until consumer spending rebounds, which he thinks could take years.

Mr. Taleb said any deflation would be matched by an aggressive move by governments to stimulate their economies, leading inevitably to an uncontrollable surge in prices.

Deflation Vs. Inflation

The emergence of Wall Street products to protect against hyperinflation may, in fact, be a contrary indicator.  Many times in the past, eager buyers have rushed into investments pushed by Wall Street as a trend was nearing its peak.

Washington’s massive deficit spending and the lack of fiscal discipline it represents will no doubt end badly.   At this point, however, stimulus spending, bailouts, guarantees and deficits have done nothing to reverse the decline in real estate values, corporate profits, consumer spending and consumer incomes.  Events of the recent past have shown how quickly the country’s finances can change, but deflation rather than inflation seems to be today’s enemy.  The rampant price cutting and decreasing incomes that we observe today are not the classic ingredients of inflation.

The event that may mark the tipping point into hyperinflation is how the Federal Government responds to the deficit crisis facing virtually every State in the country.  Discussing the perils of a federal bailout of California, Peter Schiff recently noted that :

However, if Obama comes to the rescue, none of the needed cuts will be made. Instead, California will continue to operate its bloated bureaucracy and will be in constant need of more bailouts. In other words, if Schwarzenegger gets his bailout, look for him to utter his famous line – “I’ll be back.”

But it’s not just Schwarzenegger who will be back, but governors from all the other states as well. After all, if the Federal government bails out California, by what right can they deny similar aid to other states? The bailout will send a clear message that states do not need to cut spending.

The need to make good on state and federal obligations will further depress the appeal of all U.S. dollar-denominated debt. As a result, as real buyers flee the market, the Fed will have to run its printing presses even faster to pick up the slack. This will set into motion a self-perpetuating spiral of money printing and Treasury sales with a predictable result: hyperinflation.

Should we reach the point where the Federal Government winds up bailing out virtually every State in the United States, we will have reached the point of total financial absurdity.   As I have previously pointed out, “The United States is not an abstract construction with a separate economic destiny,  immune to events in the rest of the nation.  The United States are 50 States joined as one.  If nearly every one of the 50 states is an economic train wreck, the conclusion for Uncle Sam  is obvious.”

If the Federal Government adds the States to the bailout list, Universa’s hyperinflation fund will have more customers than it can handle.

California’s Crash Omen of Nation’s Future

Borrow and Spend = Crash and Burnbig bag of indeterminate money

California has always been the trend setter for the nation but never more so than today as it totters on the edge of insolvency.  The theory that States or Nations cannot go bankrupt due to their unlimited taxing powers has reached its limits as California voters have resoundingly rejected further tax increases.  Without a Federal bailout, the State of California will be forced to make massive budget cuts.  The illusion of a free lunch, paid for with borrowed money is now replaced by the harsh reality of a mortgaged future.

California may be in the spotlight today as the first major state to collapse financially, but most of the Nation’s other 49 states are not far behind.  Tax revenues have declined in 45 other states by almost 13% in the first quarter and are likely to continue declining as both corporate and personal incomes decline.  For the first time ever, the biggest source of revenue for the States is from the Federal Government.  Almost all 50 States are at the precipice.

Given the absolute financial disaster occurring in almost every State, how long can it be before the ability of the US Government to pay its debts is called into question?  The United States is not an abstract construction with a separate economic destiny,  immune to events in the rest of the nation.  The United States are 50 States joined as one.  If nearly every one of the 50 states is an economic train wreck, the conclusion for Uncle Sam  is obvious.  Can the whole be greater than the sum of its parts?

Numerous doubts are being aired daily about the credit rating of the United States.  Consider some comments from today:

Britain’s Debt Omen

For a warning about America’s fiscal future, consider yesterday’s news from Britain. United Kingdom stocks, bond futures and sterling all fell after Standard & Poor’s lowered the country’s credit outlook.

But in both the U.K. and U.S. today, the politicians in power equate government spending with growth. So on present course, Britain’s credit future could well be America’s in the coming years as U.S. spending soars.

Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone

Several policy missteps suggest that investors should stop trusting — and lending to — the U.S. government.

“All currencies are being debased dramatically by their central banks at extraordinary speeds and so in relative terms it appears there is no currency problem,”  In reality, however, paper money is highly vulnerable to a public catalyst that serves to acknowledge it is all merely vapor money.”

For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.

David Walker, a former U.S. comptroller general, wrote in the Financial Times on May 12 that the U.S.’s top credit rating looks incompatible with “an accumulated negative net worth” of more than $11 trillion and “additional off-balance-sheet obligations” of $45 trillion. “One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate,” he wrote.

Flip-Flops and Governance

Mr. Obama campaigned on “responsible fiscal policies,” arguing in a speech on the Senate floor in 2006 that the “rising debt is a hidden domestic enemy.”

However, Mr. Obama’s fiscally conservative words are betrayed by his liberal actions. He offers an orgy of spending and a bacchanal of debt. His budget plans a 25% increase in the federal government’s share of the GDP, a doubling of the national debt in five years, and a near tripling of it in 10 years.

US Officials Vow Fiscal Vigilance

Treasury Secretary Geithner and President Obama both acknowledge that out of control spending could eventually lead to default, credit market rejection and a lower standard of living as the cost of debt servicing destroys our standard of living.

Geithner Pledges To Cut Deficit

May 21 (Bloomberg) — Treasury Secretary Timothy Geithner said the Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade.  He added that the target is reducing the gap to 3 percent of gross domestic product or smaller, from a projected 12.9 percent this year.

– the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Obama Says US Long-Term Debt Load “Unsustainable”

May 14 (Bloomberg) — President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

The Future Reality

The President and Treasury Secretary say what they have to say.  The reality is that the present course of unlimited credit expansion, quantitative easing, bailouts  and massive deficit spending will continue in an attempt to re-inflate asset values and stimulate spending.   The Government will not accept  alternatives that they view as being worse – deflation and a collapsing economy with civil unrest.  California will be bailed out like everyone else.

The course of action for long term wealth accumulation under the present circumstances seems obvious.   Avoid  an over concentration in paper assets (debt) that can be produced by governments in infinite quantity at zero cost.   Diversify into assets backed by 1) real services or goods that there will always be a demand for and 2) natural resources such as commodities, oil and gold.

Economies Plummet – Markets Yawn

What Are The Markets Telling Us?

The reality disconnect between the markets and the economic news has become extreme.  Consider the following headline:

World Economies Plummet- WSJ

Steep declines in the economies of three of the U.S.’s biggest trading partners — Mexico, Japan and Germany — underscored the severity of the global recession

On Wednesday, Mexico became the latest country to report a plunge in output. The country’s gross domestic product fell at an annualized rate of 21.5% in the first quarter

Mexico’s decline followed by a day Japan’s report that its economy contracted in the first quarter at a 15.2% clip, its worst performance since 1955. Last week, Germany said its first quarter decline in GDP, an annualized 14.4%, was the worst since 1970.

Contrast the reported huge plunge in GDP for these three countries to price movements in their respective stock markets:

Germany DAX Index

Germany DAX Index

Mexico Bolsa Index

Mexico Bolsa Index

Japan Nikkei

Japan Nikkei

Each country reporting huge declines in GDP has seen a 25% or greater increases in stock prices since the  markets  bottomed  in March 2009.   Besides the reported large contractions in GDP, there is a plethora of other negative economic headlines that suggest markets should be plunging rather than rallying.   Consider a small list of some of the well known and seemingly insurmountable problems that the US and other major world economies face.

  • massive unemployment
  • potential downgrade of US credit rating
  • declining asset values
  • California insolvency
  • plunging tax receipts
  • massive deficit spending
  • huge consumer and governmental debt obligations
  • potential insolvency of major European and Asian nations
  • declining incomes
  • collapsing commercial real estate
  • insolvent public and private pension plans

Judge a man by his questions, not his answers – Voltaire

Many of these  problems seems beyond the point of solution yet the equity markets rally in the face of horrific news. Is this a classic bottom where all the bad news has been discounted?  Have the markets correctly priced the fundamentals or is this just the mother of all bear market rallies born of  false hopes and a deeply oversold condition?   The only certainty is that no one has the answers.

My goal as an investor is to make profits and not argue with the markets.   Governments seem determined to inflate equity and asset prices and money is being driven from the “safe” alternative of treasury bills yielding a fraction of a percent.  Besides the standard long term allocation to gold and commodities, maintaining or increasing equity positions seems warranted.  If major markets violate their March lows, the Armageddon scenario comes back in full force.