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May 14, 2010

How the US Stacks Up Against the PIIGS

The problem with the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) is not just their national debt to GDP ratios, but their total debt to GDP ratios, the worst of which, Portugal, has a total debt to GDP ratio of 300%. 

How does the US stack up?  Well, I hate to break it to you, but the United States has a total debt to GDP ratio of 3.88%.  (Total debt of $54 trillion against GDP of $14 trillion.)

No wonder the financial world holds its collective breath any time the US has a longer-term bond issuance.

No wonder China is stockpiling oil and necessary construction commodities.

No wonder the price of gold is rising.

One of the interesting parallels between the Great Depression and the situation in Europe and the US right now is that both economic recoveries have been threatened by natural disasters.  During the Great Depression we had a drought in the Midwest that led to the Dustbowl Crisis.  And now the US is facing a crisis in the Gulf of Mexico that is impairing the livelihoods of people who live along the coast (fishing, tourism, etc), and the people in Europe are dealing with volcanic ash that is threatening their summer tourism industry.

People everywhere expect China and India to fuel the recovery.  But China and India combined generate only 10% of the world's GDP.  So that's like asking a couple of kids to be the sole source of support for an entire family.  

There are a lot of things that people are pointing to that look and smell like recovery that aren't really recovery.  For example, rising prices of iron ore, copper and oil.  The Chinese demand for these commodities has been twofold - one current demand, the other stockpiling for future needs.  China's demand on both fronts is decreasing - by how much we have yet to see.

Inventory restocking has led to a bump in production that may or may not be sustainable.

Consumer spending has been fueled by some very troubling wealth shifting.  First, people are relying on credit cards and savings, rather than income to fund their purchases.  Second, there are millions of people who are not paying their mortgages right now, which gives them extra cash to spend while they wait to be evicted.  People have learned their Lesson From the Big Boys on Bankruptcy-Proofing (see my book) and are maxing out their credit in a massive national Wealth Shiftathon.  While this makes consumer spending look like recovery, it isn't.  

I have a friend who works for the Department of Homeland Security.  He doesn't get much sleep anymore.  He started telling me one day about how ill-prepared we are against things like contaminated water supplies and I had to make him stop.  

Now I know how he feels. 


May 12, 2010

Pop Quiz, Hot Shot

There's a bomb on the debt bus and you have to maintain a speed of 80 MPH.  But you are coming to an intersection.  Straight ahead is a dead end and right is a dead end, but left buys you a little more time. 

Turn left, the economic recovery plan succeeds and we inflate our way out of our current debts and buy some more time.  Go straight or turn right the plan fails, the economy goes under, and we default on every debt known to man.

It's just the kind of scary scenario adrenaline junkie Wall Street traders live for.  

But for the average investor out there, Thursday was a preview of how quickly Wall Street can jump off a bus.  A thousand points in 20 minutes while you're blissfully, ignorantly, dropping the kids off at school.   

Note to Average Joe:  Pay off your mortgage, will ya?  This game is not for you.  



May 10, 2010

60 Minutes Strategic Walk Away Segment


If the implications of this example of Wealth Shift doesn't scare you nothing will.




All In

In 2008 when Warren Buffett was buying stocks when everyone else was selling he said he was essentially "All In" on the success or failure of the US economy.  Today the EU, IMF, and US Federal Reserve have reaffirmed that the worldwide banking system is also "all in".

As a result, stocks and commodities will obviously run.  With loose monetary policy, inflation becomes a certainty.  Companies and governments will have all the money they can lay their hands on to try to spend their way out of the problem.  The Fed's balance sheet will expand, and yields on treasuries and corporate bonds will have to rise to continue to attract investors.    

People paying attention were also given the amount of time the governments of the world think they have to implement plans to live within their means, and that time frame is a short three years.  But the government-backed debt maze is now going to be $1 trillion bigger and that much more difficult to navigate.

In the past month we have learned the Nathan Hale lesson...we must all succeed together or surely we will all fail separately.  For better or worse, the Eurozone crisis has proven that there is no way to decouple the nations of the world without sustaining a level of pain that our governments and banking systems are simply unwilling to suffer.

All of this makes it imperative for the business leaders and politicians of the world to get it right.  The cost of failure couldn't be higher.  We must fight our human tendency toward flight, and work together to even the playing field in productive, rather than Wealth Shifty, ways.

If the events of last week proved anything, it proved that there is nowhere to run, nowhere to hide.  One person's paradise is smack daub in the middle of someone else's squalor.  Sheer numbers and mounting anger in the "have nots" is resulting in a flight response amongst the "haves" that must be overcome.  Because the answer is not to grab all you can, while you can, and buy an island somewhere.  The solution is to teach and train and help as many people as you can to become financially aware and capable of being productive in our 21st century world.