Debt. Debt. Debt.

Debt. Debt. Debt. That was all we heard about this summer and with good reason. The US is in horrible shape and the numbers below put it all in perspective.

Here is why S&P downgraded the US credit rating.

* U.S. Tax revenue: $2,170,000,000,000

* Fed budget: $3,820,000,000,000

* New debt: $ 1,650,000,000,000

* National debt: $14,271,000,000,000

* Recent budget cut: $ 38,500,000,000

Now let’s remove 8 zeros and pretend it’s a household budget.

* Annual family income: $21,700

* Money the family spent: $38,200

* New debt on the credit card: $16,500

* Outstanding balance on the credit card: $142,710

* Total budget cuts: $385

This Thursday the President is being called upon to explain how is going to get the economy going again.  Unlike the last go around, his options are more limited.  Because of the numbers above which we have all been living and breathing for the fast few months,  he does not have the ability to keep spending, nor should he.  The public is demanding jobs but the problem is that our economy was fueled by spending financed through debt, and that has all but dried up. It is time to get creative and provide incentives for the private sector to invest and thus create employment opportunites.  We are likely going to be in this slow to no growth scenerio for a while.  For those expecting miracles, you may have a long time to wait.

The Debt Ceiling and the US Economy

Not a small topic for a short blog entry. For weeks the headlines have been all about the US hitting their debt ceiling and the possibility of a default on government debt. Now it seems like we have a ‘deal’ that will stop that from happening, a deal that likely no one really understands let alone buys in to. That said, thank goodness there is one. One could only imagine what the consequences of a default might have been, but it might well be the case that we begin to live them out due to lack of faith that the government of this great country of ours may be ever able to stop us from drowning in debt. Monika Mitchell of Good Business International gives a great overview of this crisis which you can access by clicking here.

Many have been asking my opinion about the economy, the equity markets, the bond market and more, so here it is in brief. I would continue to hold cash, gold, fundamentally strong global equities, commodities broadly speaking over the long run, and not much else right now. Further it is likely that the US dollar will continue on it’s long term descent, so beware that if all you own are dollar denominated assets your purchasing power will be eroded away.
Why concern on US equities? I believe the fundamentals remain very poor. Yes corporate earnings and balance sheets are strong but because of cost cutting primarily, which is largely done. Without a robust domestic consumer how much hope can their be? Further the economic numbers have been horrible – employment, GDP, and more. I am particularly worried about the financials given that spreads (difference in yield between government bonds and corporate/mortgage/high yield debt ) in general are narrow, issuance is down, and the poor real estate market will work it’s way in to write-offs.
US bonds. Rates are so low, artificially low due to the huge treasury buying program which cannot go on forever. You are simply not getting paid enough to go long duration. For more on this read the latest commentary by bond manager/guru Bill Gross of PIMCO.
Gold – protection against a depreciating dollar, financial insecurity, and the declining faith in the US dollar as the currency of choice. For so much more on gold check out this website –JSmineset.
Sorry wish I could be more positive on both the economic and market outlook but I really see little good news out there. Bottom line we have spent beyond on our means for some time now, at multiple levels, and sooner or later you have to pay the price.
I am officially taking a blogging vacation so wishing you all a fabulous August.