Mid-January 2012 Update of THE GREAT DEPRESSION of DEBT

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com: http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

I trust everyone had good holidays!  For the New Year, I have decided to try monthly blog updates.  These will occur in the middle of each month. 

THE RISING DEFICIT

If you recall, over the past year we established that the causes of the rising U.S. deficit were split pretty evenly between an increase in spending and a decrease in tax rates.  We have also seen that neither of our political parties is willing to truly address both issues.  So we are unlikely to see any meaningful solution, at least not until the elections.

GOOD NEWS on UNEMPLOYMENT?

The U-6 unemployment rate dropped 1.2% from September 2011 through December 2011.  But there is another government number that does not support this improvement at all!  The Bureau of Labor Statistics http://www.bls.gov/news.release/pdf/empsit.pdf  shows September age-16-and-over employment/population as 58.4% versus December at 58.5% – virtually unchanged!  Since the workforce is 64% of the population, you would expect the drop in unemployment would be matched by an employment/population gain of 0.8%.  But the gain isn’t there!  In fact, the employment/population rate has been very stable for over two years.  And that has been during a period of high stimulus, including the extended unemployment benefits and the tax holiday regards social security withholding, which added an annual $350 billion into the economy last year.  

A good part of the perceived improvement in the unemployment rate is due to the labor-force-size calculation, which can be affected by people coming in and out of the labor-force.  Both the labor force size drop and the drop in employment rate can be seen very clearly in the chart labeled “Civilian Labor Force Ratios” on Page 28 of the graphs found in http://www.richmondfed.org/research/national_economy/national_economic_indicators/pdf/all_charts.pdf.  The employment rate dropped dramatically in 2008 and 2009, and it hasn’t recovered one iota since!

Without the continuance of current stimuli, which is only approved until the end of February, the economy will likely slow and drive up unemployment.  Republicans now have the spotlight on them.  Do they approve what some call an added tax by reversing the tax holiday regards social security?  And do they play the bad guys by ending the ever-continuing extensions of unemployment benefits?  The current depression is not yet as visible as The Great Depression.  One reason is that 99 weeks of unemployment checks are being sent to 10 million jobless Americans.

HOUSING  

A recent WSJ article noted that some big investors have turned bullish on the housing market in the past quarter.  These include the likes of hedge funds run by SAC Capital Advisors, Blackstone Group, and Goldman Sachs Group.  These prestigious groups are out of their collective minds!  Unless the time-tested concept of supply and demand has suddenly become invalid, there is no way this is going to happen.  Perhaps the reason for their bullish view on housing comes from the fact that housing prices have pretty much dropped to their historic inflation-adjusted price levels.  Or, maybe they believe that unemployment has turned the corner and everyone will be getting a job next year and immediately buying a house!  NOT GOING TO HAPPEN!

Let’s first look at housing supply.  Over 11% of U.S. homes are empty, and the U.S. real estate market is about to be hit by another surge of bank repossessions according to RealtyTrac.  And new home sales are unlikely to take off with all the existing homes on the market, some at greatly reduced prices due to foreclosures.

Now let’s look at housing demand.  Per Family Matters: Multigenerational Families in a Volatile Economy from Generations United, as of the end of 2009, the number of multigenerational households (three or more generations) in this country was nearly 5 million higher than in 2007.  That likely means that demand for homes has gone down substantially in two years.  Morgan Stanley projects some 7.5 million more foreclosures over the next five years.  Some of these foreclosed people will rent homes; but many will go into apartments or move in with relatives, further lowering the demand for single family homes.

CONSUMER SPENDING and SAVINGS RATE

Consumers broke out their credit cards for the holidays and spent!  Per Reuters, consumer credit surged 10 percent in November, its biggest jump in a decade.  But increased holiday spending was not universal.  As reported by Thomson Reuters, elite stores like Nordstrom and Macy’s had over 6 percent sales increases; Saks and Dillard’s had over 4 percent.  On the other end of the spectrum, some stores like Fred’s and Kohl’s actually saw same-store sales decline in December.  Increased sales were apparently led by the more affluent portions of our society, consistent with what we have seen with the growing wealth disparity. 

Not only did consumers use credit cards to drive up spending, they have also reduced their saving rate in the recent few months.  After dropping their savings rate to near zero before this downturn started, consumers then recovered the rate to 8%.  But now, their savings rate is back down to 3.5%.  They can’t go much lower, which means they can’t keep using this as a way to increase their spending!  And if the tax holiday regards social security is not extended, the average consumer will no longer have the extra $1,000 per year to spend!

WEALTH GAP

This whole issue of wealth disparity isn’t going away.  According to a recent poll published by the Pew Research Center, nearly two-thirds of Americans believe that the wealth gap is the greatest cause of tension in America.  And that includes 55% of Republicans.  This may become a major issue for Republican front runner Mitt Romney who is portraying this as just a President Obama ploy of encouraging envy and class warfare.   Romney may be completely misreading the electorate.

THE EURO 

I have yet to see any scenario, other than additional delaying tactics, that show how the Euro is going to survive without losing countries like Italy and Greece.  And it isn’t just the excessive amount of debt of these countries.  These countries are not willing or able to cut spending enough to make a difference.  And, even if they do, austerity will just lead to slower economies with less tax income and higher debts.  Many people in countries like Greece don’t even own up to their own responsibility for the problems.  They blame it on banks, on Germany, on the wealthy, etc.  And Germany doesn’t want to eat Greece’s debt because they think that the Greeks are lazy and just living too luxuriously.  Sort of like listening to Democrats and Republicans argue about the U.S. economy!

IRAN 

It seems like we are heading to some sort of major event with Iran this year, with perhaps Iran blocking oil shipments or Israel/U.S. bombing Iran’s nuclear facilities.  Either one will hurt all nations’ economies and will perhaps bring the world closer to war. 

RENEWABLE ENERGY

Germany is leading the way!  Per the Associated Press, “Chancellor Angela Merkel’s government passed legislation in June setting the country on course to generate a third of its power through renewable sources — such as wind, solar, geothermal and bioenergy — within a decade, reaching 80 percent by 2050, while creating jobs, increasing energy security and reducing harmful emissions.”

Apparently the U.S. has no need for “creating jobs, increasing energy security and reducing harmful emissions.”  

PRESIDENT OBAMA

Although it seems a little late, President Obama is finally making some small steps in addressing both costs and jobs.  He is suggesting merging some governmental agencies to reduce redundancy, with a resultant reduction of people.  The people reductions will come through attrition, not layoffs.  On the job front, the President is talking to companies who have brought back jobs to the U.S.  President Obama is proposing tax breaks for such companies while removing tax breaks for those that outsource jobs to other countries.  Why wasn’t he talking to such in-sourcing companies a year ago rather than dealing with the likes of Jeff Immelt, the CEO of GE, who could be the poster child of outsourcing?

These small steps by our President may help get him reelected.  But his steps are baby steps compared to the huge strides this country needs to keep us out of a depression.

SUMMARY

Real unemployment has not gotten better and is likely to worsen as the U.S. moves away from stimulus.  Housing prices will continue to drop because of all the homes already on the market and those coming on the market with continuing foreclosures.  Current increased spending by consumers is temporary, enabled by increased debt and decreased savings, both of which are near their limits.  If the tax holiday regards social security and unemployment benefits are not extended, spending and the economy will slow.  And the breakup of the Euro or some major actions related to Iran are likely to be the triggers that finally cause this whole house of cards built on a foundation of debt to crumble.  And it will likely be this year; or next year at the latest.

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 50.  The current P/D of 50 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 48% to get down to its median P/D and drop 66% to get to my own entry target P/D. 

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

Advertisement