- Excess capacity continues to plague the tech industry, in particular. Recalling the boom that sired today's excesses, Jim Grant writes, "Under the influence of towering P/E multiples, all things seemed possible, including, a couple of years ago, the seductive idea that the demand for unlit fiber-optical cable would forever match the fast-growing supply. Such misbegotten investments founder when the cost of capital rises. Laymen call them 'white elephants.' The economists' term is 'malinvestments.'"
- The market price of fiber-optic white elephants continues to plummet. "In its fourth-quarter 2001 financial statement, Level 3 took an asset impairment charge of $3.2 billion," observes the Net Economy magazine. "[Telecom company] Level 3 devalued its fiber network by nearly $1.3 billion."
- "[M]etro and long-haul fiber networks are selling for 5 cents to 20 cents on the dollar, says Sean Doherty, a managing partner of Venture Asset Group, which finds strategic buyers for the telecom assets of distress companies."
- "'There are fewer and fewer buyers because of the spiral down in the telecom market,' Doherty says, adding that the biggest problem is the lack of potential bidders. 'It's not a great situation,' he says."
- There appears to be a bit of excess capacity in the airline sector as well.
- "Business travel, a major factor in a return to profitability for the airline industry, is recovering, but at the pace of a New York City traffic jam," the New York Times reports. "While overall passenger traffic has picked up and the industry appears to be slowly recovering, the weak economy...continues to depress business travel."
- "Demand is out there," Robert Baker, vice chairman of AMR Corp. tells the Times, "but at tragically low prices. No one can make money at these prices."
- And what about our excess debt - an issue that we may have raised once or twice in the Daily Reckoning? Surely the rebounding economy is helping to reduce our national debt burden. Think again.
- The household debt service burden continues to rise, says Charles Peabody of Ventana Capital. The Fed's recently released numbers for the household debt service burden ratio show a distinct upward shift. The ratio of debt payments to disposable personal income now stands at 14.3%. Although not quite a record, it is the highest level in this indebtedness measure since 1986.
- What is somewhat more worrisome is that the ratio of mortgage payments to disposable personal income just reached a new high. "Despite the refi boom and falling rate environment," says Peabody, "the mortgage debt service component of the household debt service ratio hit a new all-time high and is still headed higher.
- "The consumer continues to leverage his/her balance sheet against inflating asset (i.e., rising residential real estate prices)," says Peabody. "This increasing debt burden and leverage puts the consumer in a precarious position should we experience any sort of economic downturn and/or deflation in housing prices." Rising interest rates certainly would not help.
- Ah, but why worry about such things? "Like fire and sex, credit is almost too wonderful," Jim Grant observes. "Producing wealth by work is hard. Conjuring up credit is easy."
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