I read something the other day about this (apologies for not having a link) that made intentionally heroic assumptions to get to US investors buying up $500 billion of that through savings and then questioning where $900 billion of more demand will come from and if there is enough demand, where will it come from next year?
Perhaps softening the blow a little is that included in these numbers is very short term debt rolling over very frequently which will soak up some portion of the supply--simple replacement-- but clearly replacing paper that rolls over regularly will not solve the problem. The numbers are daunting. China, for all the talk will buy a lot of the debt issued but we can't know how much or whether it will equal the US debt they have bought in recent years and keep in mind the US is going to be issuing more debt than before.
Next on the doom parade is the latest letter from Jeremy Grantham (here is one link) with perhaps the big takeaway being his theme of seven lean years meaning poor equity returns for that time. The bull market from 2003-2007 was also lean by historical standards. According to past commentaries from John Hussman the average bull market goes up 180% but that one only went up about 100% so lean would not be new and there were a couple of decent years in there and of course the returns in things like emerging markets and commodities more than made up for the leanness provided people had exposure.
The next nugget of doom comes from Marc Faber by way of the Daily Pfennig;
"The dollar will become worthless when people eventually realize the fiscal situation in the U.S. is a disaster. It will go to a value of zero eventually, but not right now. Looking at Mr. Obama's administration, it should already be there." He went on to say...
"In my opinion, about 50% of tax revenues will be used just to cover interest payments on the government debt. That's unsustainable. Then you'll really be forced to print money. The best investments right now are foreign currencies, commodities, and equities." And then when asked about Fed Chairman, Big Ben Bernanke, Dr. Faber said, "He's a money printer. He's nothing else."
Ooof.
Zero is hyperbole (insert nervous smile) but the notion of interest payments increasing to account more of the country's expenses in the future like above, is daunting and not something that will sort itself out in a couple of weeks. I do not know how to solve these problems. Obviously higher interest rates help with creating demand for US debt but cause all sorts of problem here on the ground. Personally I lean toward the tough medicine path to make the pain short and sharp as opposed to chronic and open ended. These thoughts of course are simplistic and as a country we lack the political will to make any tough choices.
Here is a little more fun from David Roche in the FT.
One important thing to remember in this context is that interest rates are very low by historical standards. This means prices are very high. Of course prices don't have to ever go down, for now this is unknowable, but you can know that prices are high. It would be great to be able to solve the world's problems but in lieu of that you can protect what you have which, again, means more non-dollar exposure. The idea of sidestepping most of this is very compelling.
13 comments:
Boy, the bears sure have the megaphone, don't they. George Soros says the market is at risk for a downturn and IBD has gone negative on its market outlook. Both at pragcap.com.
There's an interesting graphic in Newsweek of all places that shows the percent of GDP that goes for interest payments on our debt. Because interest rates are so low right now, only 1.2% of our 2009 GDP goes for interest payments. That's lower than any of other other five years they profile. In 1992, for example, 3.2% of our (smaller) GDP went to repay interest.
I agree with you about more non-dollar exposure, Roger, but when the dollar strengthens as it has the last few days, my portfolio gets whacked good. I worry what higher interest rates portend.
i have quantified this quite a few times before that i expect to get to about 50% foreign early in the next decade and maybe 60-70% foreign toward the middle of the decade. This decade i've gone from about 30% up to near 40%; slow process.
if you look at the outperformance of certain foreign markets over the course of this decade then the currency drag, when thought of in that sort of time frame, for a short period of time is not a big deal
Roger you are showing your negative bias and itemizing the wall of worry. Even if you believe it all we will continue seeing higher highs and higher lows in the market for quite some time to come.
Roger,
You are going to hurt one of my investment plans in the future. I have always tried to have twice as much foreign exposure as you do. I think you are to conservative for my tastes.
How the heck do I do that in the future? I do not believe in using leverage (I am not that speculative).
Being 95% cash - can sleep well.
Jeff from Milan, Italy
Apologies for a longish comment (by all means ignore).
After several decades of benign neglect the deficit has become a cause celebre and the next harbinger of doom but years of policies favoring military and non-infrastructure spending while cutting revenue sources and financial regulation have simply caught up with us, that's all. The notion that the business cycle could be controlled and cutting taxes/regulation would increase revenues anyway was merely another dream within a dream.
The dreamers told us to ignore the moral of Pharaoh's dream - when years of plenty will inevitably be followed by years of dearth you build a surplus during the time of plenty rather than overeat - and now that dearth is upon us many of these same dreamers want us to pay the piper; pain is healing you see, dulce et decorum est, for other people natch (pace Fred at http://tinyurl.com/62thay)
But a developed country has other options so central bank and government intervened on a large (but not massive in terms of GDP) scale quelling the downturn and the immediate crisis yet the revenue picture remains bleak: The deficit has not grown because of increased spending, it has grown because you can't acquire revenue from those who are not working; e.g., http://tinyurl.com/yz3kffs
One can quibble over the accounting that explains this but the bigger picture is that whatever is being spent to prime the business cycle has only partially completed the job: Industrial production is improving but the recovery thus far* not only appears "jobless" (I really hate that term) but "job less;" the unemployment rate is not only still rising but there is very little evidence of job growth or intent to hire, businesses are increasing productivity by working their current force harder instead.
So what is left but the pain? A country whose currency is 'rented' by other countries for settling trade and building reserves has effective seigniorage and can do something other countries can't: It can continue to spend and allow its currency to depreciate. This angers those who depend upon the currency of course but, interestingly, it also angers those who trade with countries using the currency as a peg; e.g., China's trading partners are increasingly angry and complaining more loudly because the Yuan is following $USD down thus giving China ever greater advantage (http://tinyurl.com/ykknbeb).
So, the situation internationally is sufficiently mixed and unstable, with export-driven and/or dollar pegged countries struggling to maintain their own balance along with everyone else, that any certainty regarding outcome can neither be grounded empirically nor warranted logically.
Shorter version, placing bets on currencies or countries alike carries greater risk than generally appreciated and Roger is right to take it very slow.
If I personally have any certainty at all in this matter it is the overwhelming suspicion that, if the dreamers (AKA deficit and dollar hawks) win the argument, we will be headed for 1933 caliber pain w/ the possibility of a currency crisis not included among our greater concerns.
JMO and apologies again for the lengthy comment.
* employment may be a lagging indicator in business cycle theory but it is not in macroeconomics generally and it makes a difference to the tax base no matter what framework you use.
RW, great post. Last week I unloaded cpr.mi ang g.mi. So I have sold even the issues that purchased from the winnings. My projection was S&P 1166. We got to 1100. RW, still waiting a book reccomendation from you on cycles. I am sure there is no book since it is a complex subject. RW, I think that you are the most knowledgeble on cycle with Roger.
Hope for the best to all,
Jeff from Milan, Italy
RW,
I have to disagree with you. Foreign investments are more volatile, but more than make up for it with better long term outlook. So the risk in the long run is in the US.
RW, g.mi was sold at 19.40, cpr at 6.65. If the us market goes down heavy so does Milan, too. However If I see bargains I will jump in. The US will come back. I agree with that there will be pain for many mistakes that have been made. I think we have started that pain. Roger was talking about another scare. Can this be the start or do we have to go to S&P 1166 to start going down? There will be lots of bargains. Recently I could not find any. I have to start looking at Australia, it seems more promesing than Italy.
Best,
Jeff from Milan, Italy
So,no free lunch.
Damn it.
Jeff, business cycle is not conceptually difficult but there are a lot of moving parts once you get into it and I am not expert (I normally approach the subject from a more qualitative macroeconomic POV). There are a lot of good materials, most freely available AFAIK, at the Economics Network Online Texts and Notes site at http://tinyurl.com/ylau74r that you could explore. I have also heard that the European version of the Krugman, Wells and Graddy text titled Economics (e.g., http://tinyurl.com/yfbrqyj) is just as good as the American version which, if true, would mean it is very good indeed.
Anon 9:56, I don't think I was arguing that the US was a better destination than other countries longer term -- if so my investments would hardly be consistent -- only that I believe the global situation remains very unstable with a probability that, as serious as the deficit is, over-weighting it in policy deliberations could lead to some very bad policy moves w/ severe market downturns or even a currency panic counted among the lesser consequences.
From a purely technical point, my mutual funds are beginning to break trendlines on a weekly chart that go back to March or June. Time to get out?
do you think those trendlines are significant?
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