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Wednesday, July 27, 2011

Thinking, Hoping & Praying

Durable goods orders came in at -2.1% versus the +0 .5% that the establishment expected.  This, along with the latest housing and employment figures, supports my belief that we never exited the initial recession -- which is now about to get much, much worse.

There may be pockets of positive news here and there, and some companies -- especially those generating most of their sales from still-healthy overseas economies -- will continue to post positive earnings.  But, the writing's on the wall.

In fact, it's very difficult from this vantage point to see any game changing news on the horizon, as the stranglehold of excessive debt against depreciating assets can only be broken in two ways:  write downs or inflation.

We've tried inflating our way out of trouble, but that strategy relies on our sustained ability to issue debt sufficient to cover our deficit -- growing exponentially through the miracle of interest on interest.  It works beautifully...until it doesn't.  And, now, as investors worldwide are reconsidering the value of "full faith and credit" the cracks are becoming obvious.

That leaves write-downs.  Many of us have experienced the joy of watching heavily-leveraged assets decline in value.  It sucks.  As anyone who's ever raided his 401(k) to make his mortgage payment can tell you, it's hard to justify hanging on to those assets when they're declining in value.

There's an old saying in finance:  if I owe you a hundred bucks and can't pay, I'm in trouble.  If I owe you a million bucks and can't pay, you're in trouble.  Americans owe $13.7 trillion in mortgage debt, mostly on single family residences that are declining in value.  And, as the bankers who've been gifted trillions of our grandchildren's dollars would attest (if they were capable of speaking the truth) the lenders of the world are the ones in serious trouble right now.

I'm talking to you, China.  You, too, Middle Eastern despots.  Let's not forget banks, insurance companies, Freddie and Fannie.  But, unfortunately, we're also talking about retirees, veterans trying to collect VA benefits and kids with savings bonds.

Look beyond real estate debt, and the problem is obviously much bigger.  Lenders are worried about the value of their loans to whole countries, present company included.   They should be.  They're about to be stiffed.

This recession started because of debt.  The debt will have to be dealt with on a global scale if we're ever to recover.  As an investor, I'm thinking about ways to protect myself.  As a citizen, I'm hoping it doesn't come to armed conflict.  As a parent, I'm just praying that the world we leave our children is worth inheriting.

1 comment:

  1. Eloquently written. I've been wondering how long it will take until "debtor's leverage" becomes a household phrase the way "strategic default" did a couple years ago.