Deleveraging the U.S. Economy

Comstock Funds ^ | 08/06/09

[TigerLikesRooster]

Deleveraging the U.S. Economy

August 06, 2009

We are in the process of deleveraging the most leveraged economy in history. Many investors look at this deleveraging as a positive for the United States. We, on the other hand, look at this deleveraging as a major negative that will weigh on the economy for years to come and we could wind up with a lost couple of decades just as Japan experienced over the past 20 years. It is true that Japan didn't act as quickly as we did but our debt ratio presently is much worse than Japan's debt ratios throughout their deleveraging process.

Presently, the stock market is exploding to the upside, which you could say argues against the case we are attempting to make in this special report. However, if you step back and look at the larger picture, you can see that the stock market is still down over 35% from the highs reached in 2007 and also down over 33% from the highs reached in early 2000. In fact, the market now is acting in the same manner as it did in early 2000 at the peak of the dot com bubble and again in 2006 & 2007 at the combined housing and stock market bubble.

This seems to us to be a "mini bubble" of stocks reacting to an abundance of "money printing" by governments all over the world since stocks are rising worldwide. Of course, if the U.S. doesn't recover there will be no worldwide recovery since the rest of the world is still dependent upon the U.S. consumers' appetite for their goods and services (despite the so called growth of domestic consumption in China and India).

[TigerLikesRooster]

Ping!

[rbg81]

We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to slow down the private deleveraging by helping out the entities and individuals in the most trouble with debt (such as over-extended homeowners).

---

So....looks like Obama WILL make your mortgage payments. But only if YOU stop making the payments first.

[norraad]

..uh, . . .ok...

[eyedigress]

Presently, the stock market is exploding to the upside, which you could say argues against the case

Invest at your own Risk, this market has nothing to do with P/E ratios.

[ex-Texan]

Excerpts:

In fact, we stated in the report that it took $1.50 of debt to generate $1 of GDP in the 1960s, $1.70 to generate $1 of GDP in the '70s, $2.90 in the '80s, $3.20 in the '90s, and an unbelievable $5.40 of debt to generate $1 of GDP in the latest decade * * *

We expect that the U.S. deleveraging will follow along the path of Japan for years as real estate continues to decline and the deleveraging extracts a significant toll from any growth the economy might experience. We also expect that, just like Japan, the stock market will also be sluggish to down during the next few years as the most leveraged economy in history unwinds the debt.

Falling real estate values will be with us for some extended length of time:

Subprime and Alt-A Mortgages Will Reset Until 2012

Pardon me, while I laugh quietly to myself. Please check my freeper page . . .

[wiggen]

the most amazing statistic-”n fact, we stated in the report that it took $1.50 of debt to generate $1 of GDP in the 1960s, $1.70 to generate $1 of GDP in the ‘70s, $2.90 in the ‘80s, $3.20 in the ‘90s, and an unbelievable $5.40 of debt to generate $1 of GDP in the latest decade. “
Now the 90’s were a period of real increases in productivity which has spilled over into this decade. One might intuit that increase would lead to less debt? Where would we be on a debt to GDP ratio without the computer age? Are those ratios inescapable as a society matures?
One other thought:Our businesses were against issuing equity for many years.They instead turned to debt. The obvious reason was insiders had more to gain by not diluting. You are seeing far more secondaries which are the easiest way to pay down debt. Ultimately earnings will suffer from dilution but its a very fast way to delever rather than waiting for earnings to catch up to principal payments as opposed to simple servicing of debt. The goverment can’t “issue” equity although they’re doing some job overpaying for it in many cases so they don’t have the same easy out that businesses do.

[WashingtonSource]

bump

[theFIRMbss]

If the US took
one or two states and made them
"laissez-faire zones" for

businesses except
for some appropriate fees
("piece of the action")

those entire states
could be like Hong Kong and drive
our economy.

At the very least
it would make an interesting
jobs experiment.

[tbw2]

Does that statistic mean that the government is getting LESS efficient with money, therefore shouldn't be given anymore? ObamaCare Jokes Obama Jokes

[wiggen]

well,you can argue medicaid is a damn good reason why they can’t be trusted with more money. Fix that and come back and talk to me when you do.
GDP is a measurement of us. (i bet people take exception to that). Business,people,everyone borrowed. Now the govt is ramping up while others are deleveraging. I can tell you now the govt will use that debt far less efficiently than the private sector. They poured money into GM and even after that are forcing business on them with their clunker program. sue that will look good for a month or 2. All this not to save just any jobs but a voting bloc. Thats a real waste of our money.

[oblomov]

Yes, note that July, month of the green shoots, happened to be a temporary low point in terms of resets.