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Carl, I want to thank you one more time for all the insight you give us. I
really enjoy reading your thoughts on the weekend. This week's note on DEBT
was one of the best. Debt is an incredible drag on the economy. It takes
either earnings or debt to fund growth. You point out the problem with
earnings every week, and, of course, debt is also a huge problem.
GDP is the numeric metric for output in the United States. GDP is roughly
$10.4 trillion.
Federal debt is approximately $6.2 trillion up from $5.8 trillion in 2001 and
approximately $1 trillion in 1982. There is another $1.4 trillion at the
State level. Net Federal and State debt is around 75% of GDP and growing.
This is the number all the CNBC commentators use and say "it is manageable".
Household debt is the combination of consumer debt and mortgage debt. That
combination is now over $8.1 trillion. We have all heard about home
refinancing and reducing the amount of equity we have in our home while
refinancing. Homeowner equity as a percentage of Household assets has dropped
from over 70% in 1982, the start of the bull market, to less than 55% now.
Credit card debt has also continued to climb. Net Household debt is 80% of
GDP and climbing up from 50% in 1982. We are beginning to hear the words from
the commentators that "the consumer is about tapped out." Household debt
burdens are at 14% of disposable income up from 11% in 1994. One in seven of
those households had monthly payments of at least 40% of their income. Home
Loan Delinquency Rates (percentage past due) are at historic highs. Credit
card delinquencies are up 30% in the past year with 4% past due. Oh yes,
saving rates are almost zero down from 12% in 1982. (Everyone was counting on
the 20% growth in the market for savings.) The Fed is helping out. Record low
interest rates have made all this debt growth possible.
In a period of deflation, where I agree with you that Cash is KING, DEBT
becomes an incredible DRAG. Since it takes debt or earnings to fund growth,
I, like you, just do not see the funding mechanism for a sustained recovery.
Deficit spending devalues the currency. The only alternatives to your magic
wand, in my opinion, are inflation (devaluation of the $) or massive
defaults. Debt then, is the biggest obstacle I see to the start of a
sustainable rally in the market. Earnings or lack thereof are second in my
view.
EDITOR: Don't think the market can't rally because of lousy fundamentals. It
can and it will, but the chances of a sustained bull market are virtually
nil, in my opinion. Certainly, with valuations at current levels, the market
is just a place for trading, not investing.
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