Continued from July 14, 2009
The bottom line is this — This is a credit driven recession and until these obscene debt levels are dealt with, the recession won’t end. The Obama administration is trying to solve a debt problem by creating more debt. At this point the only temporary reprieve for the United States is that the rest of the world is in worse shape than we are. However, we are on a very slippery slope. The Federal Reserve is now buying back US Debt, effectively monetizing the money supply; and, when the fed is the only buyer left, the brown stuff will hit the proverbial air moving machine.
Still not convinced this is a credit driven recession?
Take a look at the following chart of credit card debt as compared to household income. Note the recent, abrupt decline – now you know what consumers are doing with their money — saving it and paying down debt. (Source of chart: businessinsider.com).
This is a consumer trend that will likely continue. And, to a certain extent this trend will probably self-perpetuate. The tougher the economy gets, the more people get fearful, and the more likely they’ll save and pay down debt.
Retiring debt, or paying for the debt driven economic expansion is the price one pays for living on credit. At a certain point, you’ve got to pay up, and that’s what American consumers are doing now and will likely continue to do for a few years to come. That’s why I believe this recession; despite the government throwing money at the problem will continue and possibly deepen even more.
The bottom line is this – a debt problem cannot be solved by creating massive amounts of additional debt. In my view, the best case scenario is that another credit driven bubble is created giving temporary relief only to make the subsequent economic landing even harder. However, given current economic circumstances, such an outcome is highly unlikely despite the Federal Reserve’s actions.
What does all of this mean to you and your money?
The politicians are trying to solve a problem they can’t possibly solve until they deal with the debt – both public and private. Unfortunately, they’re taking a polar opposite approach. The creation of additional debt will likely continue to be a drag on the economy and on investments.
Another stock market rally? A possibility although I believe this is not imminent. Based upon our economic circumstances and the impact they will have on corporate earnings as well as current stock valuations, I fully expect the markets to retest the prior lows and possibly reach new lows.
You can be the judge, but it is my opinion there just may be more downside to come.
Those wise folks who are raising cash on rallies and utilizing an absolute returns* style of money management just keep getting wiser.
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