I have gotten some feedback from many individuals about the negative attitude that I have towards the markets, in particular the equity markets going forward. I do not want to be viewed as a perma-bear or a consistently negative person. My main reason for having a blog is to try to relay what I see in the markets in the easiest terms possible while being open to conversation and debate. I had previously addressed the reasons for the credit crisis in the post “Financial Weapons of Mass Destruction and the Credit Crisis“, but let’s just summarize where we are NOW.
So no matter what the stock market is doing, what truly matters? What should we be focused on: Economic growth, low tax rates, low unemployment, manageable debt burdens, low inflation, high innovation, strong property and IP rights.
Now let’s focus on what has derailed:
Debt has skyrocketed in the public and private arena since the 1980’s. The growth in debt has been fueled by the US dollar being the world reserve currency which has allowed the government and private individuals to borrow their way to prosperity. The growth in household debt to propagate a consumer culture and import society has been the most spectacular. This is unsustainable. Whether we are able to keep this ball rolling for another few years is immaterial. The fact is that whether slowly or quickly, the whole thing needs to be corrected. This could be through years of slow growth and depreciating assets or a quick collapse of the dollar and effective default on debts(maybe even through equitizing debt).
Now what about the sustainability of the credit bubble in which we continue growing through ever increasing amounts of debt:
So look at the simple figures above and tell me what they mean to you… I would never suggest that the market cannot move further than rationally possible, but it is hard for me to believe that corporations will increase revenues significantly and continue to grow at a decent pace with 10% unemployment, rising foreclosures, an incredible debt burden and rising bankruptcies (corporate and personal).
Nothing has changed since last year except that the government has transferred liabilities from bank balance sheets to the government balance sheet…and ultimately, who fuels the government? The consumer/tax-payer. I still see quite a few weak links in the chain and that’s where my pessimism comes from.