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Opinions vary... An alternative view on the markets

Discussion in 'Business, Investment and Economics' started by kahuna1, Oct 29, 2011.

  1. kahuna1

    kahuna1

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    Its been a while :}

    Markets ... basically even more worried for the future despite the Greek solution overnight. Longer term it was a pimple in the overall situation and does everyone everywhere take a haircut ?

    The total debt problem even for the EU worries me ... for the USA the official debt at 14.2 trill ... the measures to date budget ones there don't even come close to addressing the problem. Real hard debt scary at 40 plus trillion if not even higher via Medicare stuff. They need to slash this exposure ....
    Even when I go ok they radically cut exposure social security and cut benefits and raise the retirement age which they seriously have to ... current social security liability somewhere around 13.6 trill ... cut it to 6. Likely via raising the retirement age to 70 if not 75 !!
    Still have unfunded govt benefits pensions at 4 trill plus their medical plans 1 trill ... if they really slash the contingent liability of Medicare and Medicaid ... in its present form something like 60-70 trill ... slash it to 10 ... Basically you get sick and its tuff .. . and then the cost of the bailout of the financial sector at somewhere around 2 trill. The total of the unspoken stuff .... currently say 80 trill ... after massive cuts and ones govt. will serve one term on ... the lowest I can see it going is Soc Sec 6 + Govt employee 5 + Medical 10 + Bailout 2 = 33 trill. Add this to 14 its 47 trill,
    This is after insane slashes and cuts all over the place ... raising retirement age to 70 in 15 years for social sec ... reducing payouts ... medical side just awful cuts.

    So ... hmm sorry rambling .... Lets pretend the US govt is a household.
    Current
    US tax revenue 2.17 trill
    Budget 3.82 trill
    Deficit 1.65 trill
    Recent proposed tax cuts 0.35 trill
    Numbers don't work out ~~~ !!!

    Slash it down to a household budget
    take lots of zero's off it ...
    Revenue 21,700
    Spending 38,200
    New onto credit card each year 16,500
    Already owing on credit card 142,700.
    Budget cuts $385-

    Make sense ???? Doesn't to me.
    When I add the rest of the unspoken but very real debts and obligations the US has ... even the massive slashing I am talking about which aint going to happen
    How can they even ever repay this debt ? Let alone the 33 trill extra ?

    Its insane
    Revenue 21,700-
    Debt 472,700- and this is very much cut down !! Right now if unchanged its about 40 trill higher via Medicare or 750,000 debt vs income of 21,700.
    HOW DO YOU REPAY A DEBT OF $472,000- with an income of $21,700- ?

    HOW LONG WOULD THIS TAKE ?

    AT even 2% the interest alone is over 33% of your income.

    If the market decided to charge a real rate of return such as one 2% over the inflation rate of 4% right now it would be 120% of household income.

    Even if they decided to go nuts and try and repay it or reduce it allocating 40% of all income to the problem it would take 150 years to get it back to zero. That is if the market was willing to get negative real returns !!!
    If allowed and the market is allowing it AT PRESENT ... The US is understating their real inflation picture by 2% or so which erodes the value of the real debt and has to date been able to borrow at insane rates which guarantee holders of us bonds take a real loss if held to maturity on a 10 year bond of 25% on official inflation rates and likely 50% in purchasing power at the end of the term.

    Does this lovely state of affairs continue ? As someone who have been involved in financial markets and bond markets for nearly 30 years there is a simple rule. When inflation is eroding the real value of your money and purchasing power YOUR AN IDIOT NOT TO DEMAND A HIGHER RATE OF RETURN ... VIA INTEREST RATE to compensate you for the high rate of inflation.
    Sobering stuff.

    Just worries me as the USA eventually has to give a haircut to everyone ... when the market wakes up to this eventually bond rates will go nuts as they should have already. Opposite of course has happened to bonds and the lesson with Greece and many of the past Mexico three times I can remember Russia ... Argentina Brazil and a long list ... seems to have been lost at present in the market.

    The USA is paying 2% for 10 year bonds when the inflation rate the official one is approaching 4% and likely real rate is MUCH higher. In other words investors are willing to earn and loose 25% of their money on official inflation numbers and likely loose 50% of their purchasing power over the course of a 10 year bond.

    Is this how the USA deflates its way out of debt ? I do strongly suspect at some stage maybe not next week or even next year the market DEMANDS what it should already be getting. What happens to equities with rising interest rates when the US fed runs out of ammo is pretty obvious,
    Suspect maybe a bit more this rally 4,500-4,550 on the ASX 200 but for me have to not be invested much up there as the overall picture is quite sobering.

    Clapping our hands as the Greek situation is resolved when the overall situation is a government debt and obligations right now of around 200 trillion vs the 100 billion just solved. This is including all EU and UK and Japanese and US problems as they stand. In other words 1/2000 th of the problem solved and it inspired the market. Happy for it to continue for a while but not inspired longer term.

    On one hand China and emerging nations keep going despite the doomsdayers predicting a crash and since 1990 I have heard at least two predictions about China each and every year. During the GFC what happen to them ? Nothing. Second tier ones like Indonesia enjoyed a 5.5% GPD growth during the worst of it.
    Sadly with over 6.9 billion people on the planet and about to hit 7 billion the emerging nations with low per capita GDP will keep growing as they aspire to become western consumers.

    Demographics of the developed nations is that the percentage of people over 65 and drawing on pensions in the USA will go from 12.3% in 2010 to over 21% in 2030. In other words the number will rise 70% and pressures on the unfunded Medicaid and Medicare will crush the living daylights out of them. As for the social security hole at 13.6 trillion even raising the retirement age to 70 will still have it at 9 trillion and I used the age of 72 to come up with my best case for them at a hard debt of 6 trillion.

    Australia will of course fare better than this as this sort of debt is not even a decent fraction of GDP vs the real US one at 300% of GDP. As to the aging population with our underpopulated nation and immigration we actually have some years a decent percentage arriving in net migration and likely to rise to around 0.5% of our overall population by 2015. Yes we will also have an aging population but the rate will be far less than the USA.

    All of this is still the old game of musical chairs and when the music stops as it will again I do wonder what the outcome will be. Given the devaluation in real terms of US dollars and likely at some stage implosion of US and others debt I would prefer to be holding hard assets but none of them attract me at this stage and shall wait till the wheels fall off again.

    Cash is king for short term, but longer term not sure cash will be worth much especially US Dollars. It is the last place I really want to be but right now have little choice. Getting a safe 6% vs bloated asset prices on real estate leaves me wondering what was learnt via the USA and UK and EU debacles. Eventually this state of unreal affairs has to end. When it does I would like to see a real rate of return on bonds for EU and USA charged. Holders of Greek debt just lost 50% of their investment. US bonds and given the picture painted above leaves me gasping for air.
    At some stage I want to buy into a business via shares that can adjust its prices according to inflation but pay about 33% less than current levels. Call me greedy but this GFC continues on its merry way and eventually as was the case late 2007 someone will blink.

    Debating about the scale of the oncoming debt disaster a waste of time. Numbers on Medicaid and Medicare liabilities along with social security and unfunded US pensions for govt workers pretty well known.
    This is the first time in recorded history a borrower has been able not only to pay negative real interest rates for any period of time but also dramatically increase the amount of its actual borrowings along with it. Neither makes sense and these things having seen around 15 of them over the course of the last 29 years end badly. This one is on a scale that would make the high flyers of the late 1980's and early 1990's very proud. The NASDAQ at 5,000 vs its low nearly 80% lower a few years latter comes to mind.

    Would love to see another few %% on the upside to exit everything other than ultra conservative shares.

    Have fun

    Mark

    Written yesterday morning. Obviously the close was nearly 2% lower than the highs and happy to have taken some risk off the tables. Still of the same view the 4,500-4,550 should contain the upside on the ASX 200 if we get there for now. US problem being ignored as per normal and the musical chairs continues.
     
  2. satanoperca

    satanoperca

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    Re: Opinions vary ... An alternative view on the markets.

    Could not agree more.

    The figures are scarey and sooner or later will come to pass.

    Cheers
     
  3. professor_frink

    professor_frink Moderator

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    The US govt isn't a household so there's really not much point in crunching the numbers like they are:2twocents
     
  4. So_Cynical

    So_Cynical The Contrarian Averager

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    The US can make big savings cutting the military budget, will be exiting Iraq over the next 12 months and Afghanistan in 2 or 3 years..the US also has low tax rates for the rich and few consumption related taxes so lots of scope to raise revenue there.
     
  5. kahuna1

    kahuna1

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    The US govt isn't a household so there's really not much point in crunching the numbers like they are

    ?????

    Call them whatever you might ... goverment ... a business whatever.

    If it makes no sense to you to actually looking at the ability of any entity whether it be a goverment or company to finance or repay debt .... I am lost as to why you might be interested in finance or financial markets at all.

    Goverments and goverment policy via both fiscal and monetary policy actually influence where markets go. When a nation backs itself into a fiscal hole ... and unless your suggesting the USA with 250% plus of GDP debt and obligations is not there .... and adding another 10% of GDP each year to the total and soon to grow to 25% as the demographics change and more pressure mounts on those unfunded sectors of their obligations ..social security .... means not a lot ... Well as I said opinions vary.

    US money spent in and on the military .... is around 660 billion. Even were this cut in half .... which is totally unlikely the savings of 330 billion ... vs a deficit of 5 times this again not the answer to the problem.

    Back to my sandpit
     
  6. tech/a

    tech/a No Ordinary Duck

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    Much will be written off
    Greece bonds were devalued 50%

    There is no way for any of us the know the truth
    Positive or negative.
    All speculation.
     
  7. Mrmagoo

    Mrmagoo

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    This debt has not appeared over night and the domestic-on the ground US economy has been toasted for a long time, the UK is possbily worse.

    This is not the first time a country has been in a huge amout of debt and keep in mind we've all been fighting several wars without tax increases.
     
  8. robusta

    robusta

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  9. Agentm

    Agentm

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    i kinda like this one

    its as clear as it can get, if you dont get this one then nothing will get through imho!!

    all we need to do is believe in fairy tales and follow the fancy that someone else, persons unknown, are going to come up with "1 trillion dollars" and bail out the current debt

    and we have many PIIGS to go still with far more frightening debt to come

    just kick the can down the road and enjoy the ride and be on the right side of the trade when it hits the fan

    lol


     
  10. kahuna1

    kahuna1

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    Just did a bit of work on this ...

    Govements ... and trating them like a business and found the COB does produce the numbers I was mumbling about ...


    Anyhow ... topic asked about selling US assets to pay down the debt or obligations.

    Can US sell goverment owned assets ? To pay down this debt ?

    Well at first glance NO ... second and third NO.

    Unlike Australia they privitized a lot of public things long before we did from Phones to Banks so there is no magic sale of a telstra out there. Scarily and I say this with no malice involved they are in such a deep hole I see no way out NONE.

    There is no magic cure other than what I have suggested. Telstra for example represented about 10% of our own GDP when sold off and that was the extent of our problem. Right now our welth fund they created from some of this and surpluses is around 80 billion or 6% of GPD.

    There is of course a lot of assets any goverment holds and could sell if needed but to compare real assets in Australia vs those in the USA the sums come up weirdly short. We had a whole list of assets they sold in the 1990's and beyond that repaired the damage from CBA to Telstra to state banks and various other electricity and water infastrucure things. The USA on the main sold these a long time ago.

    When looking at recent debates on selling assets of the US goverment they are talking about things which you just cant sell like gold reserves or foreign reserves and even if they did the actual amount was 10% of the official debt of 14.27 trillion for these things so raising 1-2 trillion but cutting your own throat in the process was and is not an option.

    I talk about real debt and real obligations ..... GDP 14 trill debt official 14 trill ... actual real debt if we used offical accounting stnadards and obligations as they stand right now ? WELL OVER 70 TRILLION !!! or 5 times GDP.

    Simply put it would take 50 telstra type sales to get rid of it all. Things they are talking about as up for sale in reality are not possible to sell ... such as national parks and various other things. Sure they could have a fire sale of various goverment assets and likely raise a fair bit but we are talking fractions.

    If you want reality ... buried deep withing budget papers is the real deficit vs the reported one.

    In 2008 the offical US goverment federal deficit was 455 billion ... when they used the same accounting standards as every other comapny is forced to use the actual deficit including obligations not paid for via social security, medicaid, medicare , govt pensions ect ect ... WHAT WAS THE REAL DEFICIT ? US 5.1 trillion or 40% of GDP.

    Does this scare you ?

    It does me.

    http://theeconomiccollapseblog.com/archive...s-national-debt

    Add the 2009 + 2010 + 2011 fiasco's where not a cent has gone to these obligations and hence the reason why my estimate and concern pre GFC 1 ... at the level of real debt being 40 trillion plus via these unfunded obligations and why now I suspect via non funding and 20 trill real obligations run up plus inflation at near 4% ... leaves me with a sobering number near 70 trillion.

    What assets can the US sell to meet this sort of number ? It doesn't have them frankly.

    Weird thing is we in Australia get junked with the USA and their problems but a funny thing is that the goverment here Federal goverment in relaity owns massive assets which would blow your mind.

    I still cant find the 2009 Gaap aaccounting numbers !!! let alone 2010.

    The CBO ... congressional budget office in 2008 estiamted itself the actual debt and obligations I mumble about at 65 trillion !!!
    Thats the goverment itself.

    http://www.wnd.com/?pageId=88851

    Assets for sale in Australia ... Crown land alone comprises 23% of the whole nation. If you add the fact that most of the country is not owned freehold but under crown leases .... and the Federal goverment actually retains ownership of these lands OWNERSHIP and comprise another 42% of the land mass of our Country ... the grand total is 65% Not held via freehold owned by the goverment of Australia.

    We go to the USA and use the same equations and the grand total all categories comes to 30% . Goverments have to hold these lands for various reasons but they in the main cant be sold in reality.

    All an interesting aside I suspect.

    Nice to see the US Congressional Budget Office ... COB ... not totally asleep.

    Bingo !!

    QUOTE
    American public is largely unaware that the true negative net worth of the federal government reached $76.3 trillion last year.

    It exceeds the GPD of the planet by 14 trillion !!!

    This is 2010

    http://startthinkingright.wordpress.com/20...-entire-planet/


    Sobering thoughts .... for Melbourne cup day.

    Maybe they should put a bet on and they can pay it off if they win.

    No only solution is massive cuts in outlays of 25-30% ... adding tax take by 25-30% and some serious belt tightening for 10 years.

    Good luck

    Just lost my lunch reading all this.

    Cheers

    Mark
     
  11. professor_frink

    professor_frink Moderator

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    I mentioned it because as a government that issues it's own floating fiat currency they aren't constrained in the same way a business is. There's no solvency risk when you have the ability to issue cash at will:2twocents
     
  12. doctorj

    doctorj Hatchet Moderator

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    Whatever happens, it will certainly be interesting. So far there has been two different trains of thought. In the UK and Europe they've spent a lot of time talking about austerity and bringing down sovereign debt to more manageable levels. In the US, they've taken some measures to reduce the deficit, but the government is for the most part still spending.

    Time will tell what works best. I'm beginning to wonder if perhaps the US approach was better - and it appears UK politicians are starting to wonder the same. I think it's important to differentiate between the short term and the medium/long term.

    In the long term, Debt/GDP levels are too high in the UK and the US. In the short term, this doesn't really matter as long as you have the liquidity to make the repayments and have a plan for the long term. If the market doesn't think you're able to fix it in the long term, your long run problem will quickly become a short run problem as the market drives up yields and effectively prices you out of refinancing (see Greece).

    So the question is how to fix the long run. If the relevant measurement is debt to gdp, you can strive to either reduce debt (e.g. UK) or increase GDP (e.g. US). This is why I'm beginning to wonder if reducing debt through austerity is a dangerous strategy as you threaten GDP growth - so even if you reduce the absolute amount of your debt, you could still end up with a high level of debt on a relative basis. So if you're a country with your own currency (particularly if that currency is a reserve currency), follow Keynes and spend in the short run on infrastructure and the like and work out a plan to deal with structural deficit reduction in the long run. What matters in the short run is not your debt levels but the market's confidence in your ability to repay (or refinance)!.
     
  13. kahuna1

    kahuna1

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    Hi there,

    Yep I get your view ... and the markets. It is however a real debt .. a real obligation and as the baby boomers retire and draw on their savings and demand the governments promised benefits via pensions .. social security and medical care the real numbers are by 2025 the total take of US tax federal side right now will be paid out on just these three items.

    Solvency risk when you just print money I suppose is not there but they cannot print this much. We are talking over 5 times the total GPD for the USA and more than the GDP of the world.

    At some stage someone blinks and when it happens it will be fast and many will say it was out of the blue yet the numbers are fairly clear.

    Japan has the highest official GDP to Debt ratio of developed nations at 240% of GDP. Its seen as a low risk for default as most of this debt is held internally. USA on the other hand is relying on world capital markets to fund this debt and ongoing at an ever increasing pace.

    When you essentially need to double or triple the amount of debt you are holding over say a 15 year period and this is an at best scenario with massive cuts .... there frankly is not enough free capital or savings out there to even fill this void.

    I have no idea how this will be filled but the USA relies on the good will of nations to buy their bonds and fund this debt ... sadly they have little intention or ability to repay it or address the problem. Printing US dollars has worked on little stuff and the official debt ect and playing with 500 billion - 1 trillion a year. Sad thing is official and real debt is going up 5 times this amount each year and the market is baulking at this and has little ability to absorb any more of this let alone doing it on a scale much larger.

    Eventually creditor nations will put their money somewhere else into other assets or currencies simple as that. Already we have seen this and will continue to see much of the same as time goes on.

    No idea how this unfolds or unravels but it is a real debt via accounting standards and if they debase the value of the US dollar via printing money the problem still will remain for US consumers and savers with their money in US dollars the retirement funds they had set aside will have much less purchasing power than before.

    My gut tells me eventually the US bond market stops being supported for this mountain of debt and no matter what the US fed pulls or tries the long US bond rate rises as it should to reflect this loss of purchasing power via inflation or debasing of their currency.

    Only time will tell
     
  14. craft

    craft

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    Hi No. 1 Kahuna

    The US undoubtedly has a projected US fiscal Imbalance. However it is not in my view that the deficits will inevitability persist and be funded via external debt.


    The US has a GDP per capita of around $48,000. Any inability to balance the budget and share the spoils in a sort of equitable way is simply a lack of political will at these income levels.

    If US can’t find the political will to balance the budget then the market will eventually impose restraints as the external debt grows – However I think there is a lot of headroom left yet.

    US External debt is currently around 14 point something trillion as is their GDP, giving them an external debt to GDP ratio of approx 100%. The debt however is just one side of the balance sheet. If you bring in the external assets then the US net international investment position is around negative $2,471.0 billion.

    This is a NIIP to GDP of around 17%. This figure is not very demanding. In comparison for example, Australia’s NIIP to GDP is running around 60%. In addition the makeup of the external assets and liabilities and their associated revenue /expense means that the US actually runs a Net Income surplus which goes towards offsetting the trade deficits. Australia in comparison runs a 3-4% Net Income deficit.

    Further more changes in capital values which are not included in the Current Account Balance work in favour of any country whose currency is depreciating.

    In short. US external debt position is relatively healthy at the moment and given the mess of some other countries it is not that surprising to see the markets pricing sovereign debt as they are.

    In the long run however the forecast US Fiscal deficit is not sustainable. No matter how the parts move in the short run – long term if you continue to spend more then you earn you will eventually be destitute.

    For me the real question regarding the US is what impact does balancing the fiscal position have on growth? Placing/funding its debt is not the current concern and won’t be unless the fiscal can is kicked down the road to such an extent that funding the future deficits causes the NIIP/GDP to balloon and create a substantial Net Income deficit.

    Australia is walking much closer to the external debt cliff edge at the moment then is the US. The hand rail protecting us was ‘Made in China’ Hope it is up to spec.


    Opinions vary!
     
  15. kahuna1

    kahuna1

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    Great post.

    Many thanks.

    Yep opinions vary ....

    the net numbers look fine even to me and yes agree the Australian one more than the US ... and always has been for some simple reasons ... as you say we have ourselves mortgaged to the China boom. Largest expansion in capacity on the resource side ever seen.

    Lots of other reasons and more about structural nature of Australia and who owns what utilities as opposed to say the USA and how they are funded.

    All somewhat an aside.

    Simple maths ... the total US deficit exceeds the TOTAL global trade surplus of every nation on the planet and is increasing not decreasing. Sure that ratio looks fine ....

    The US is however demanding 100% and more of the free capital of the planet and is prepared to pay less not more for this. Only time will tell of course which way it breaks.

    Expansions in our mining industry alone are right now 134 billion or about 10% of GDP.

    We are exposed very much so to the China story ... these ratio's and trade numbers have been hammered for the last few years as long term expansion projects are being set up. Pluto and all the LNG gas ones ... expansions by BHP and RIO and FMG in iron ore just to mention a few.

    When on line if the house of cards holds together which i suspect it does the current account of 2011 vs that of 2020 will be interesting to say the least. Exporting another 250 mt of iron ore alone even at $100- a ton .... a mere 25 billion plus ... the LNG expansions of Pluto Wheatstone Gorgon and others dwarf even this about another 60 billion a year. Add a few ones if Olympic dam ever gets going ... 5 bill ... the numbers are staggering on projections. Our terms of trade are about to be turned on its head .... as long as the story remains the same.

    With 7 billion now on the planet and China a big factor that every man and its dog has predicted stops at least 20 times in the past 20 years I suspect it doesn't. then those outside China large but growing nations from Indoesia to Brazil and India to Phillipines and Vietnam and Turkey ... should be an interesting time.

    I cant see any ray of hope on the US side. And yes agree our accounts and demand for debt not great however being repaired and over time will be repaired as more and more via the 9% super contributions hits savings vs spending I have not too many concerns even short term on our accounts.

    As you say opinions vary.

    But when one nation demands 100% of the supply of something and says it will pay less ... as the USA is doing and hopes to continue to do ... it aint never ever going to work.
     
  16. Knobby22

    Knobby22 Mmmmmm 2nd breakfast

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    They could increase the tax rate and wipe out some of the amazing loopholes that the US has.

    If you earn over $150,000 in the US and pay more tax than your personal secretary, you're just not trying.

    There is plenty of wealth, the Feds just aren't getting any of it.
     
  17. craft

    craft

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    Hi Kahuna1

    Opinions do vary – including mine on a regular basis as I try to understand all the complexity and factor in different possibilities that could arise in an unknowable future. So please take my posts as discussion rather than arguing a particular position.

    Yes I’m fairly comfortable with the current position. The projection is not good though, based on their current tax and transfer system settings. But with a GDP per capita of $48,000 they have plenty of scope to move. As Knobby put it, there is plenty of wealth, they just have to legislate to bring in more taxes and/or cut back on their promises.

    I think it is unlikely that they will continue a fiscal deficit to the point of incurring prohibitive default yields in their debt pricing.

    The question for me is what impact does balancing the fiscal positions have on growth. The current deficit is adding a lot of stimulus to offset the deleveraging in the private sector, without it growth tanks. That maybe not such a bad thing as we live on a planet with finite resources, but a change in growth expectations would trigger revaluations.


    I think I have my head around how trade surpluses and the foreign reserves derived by these surpluses have acted to be the driver for global credit growth - but I do not understand why you believe deficit financing would be limited to global trade surpluses.

    Bigger picture though – I do think global credit creation is slowing since (caused) the GFC and whilst I have argued that US will not in the short term face a larger default yield on their borrowings I do think that scarcity of credit could start to lift debt yields – but subdued until an expectation of growth or inflation re-emerges.

    Australia – in contrast to US has a projection that looks good but a starting point with external debt that is not a strong. If the two countries defy their outlooks then Aus underperforms an optimistic outlook whilst the US outperform a pessimistic outlook. Plenty of Risk/Return implications to consider there.


    Cheers
     
  18. Mistagear

    Mistagear

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    The world economy is a giant Ponzi scheme and the US has been a 3rd world economy for years but they dont know it yet, so what.
    There is only one thing a trader can do about it, Trade the chart !

    K1, you do a lot of thinking and pondering and whilst it may sound good, its all just a waste of time because sentiment drives markets, not fundamentals.
    Keep trading the SPI buddy and stop worrying about the rest.
     
  19. Ves

    Ves Beyond Good and Evil

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    But what causes sentiment? Charts?
     
  20. pixel

    pixel DIY Trader

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    As a first stab I'd suggest it's media reports that can influence sentiment. So, where do media "ralking heads" get their wisdom? Apart from making it up - as many do on the fly - reporters listen to other media types; the Internet offers a wide variety of ideas that can be plagiarised - oops! "researched" is the preferred word.
    For a purist Trader like Mista, that question doesn't arise. Instead, the Trader asks "How can I detect sentiment, measure its momentum and direction, and take advantage of it?"
    Add vectors; determine price, volume, and duration; then take profit and move on to the next.
     
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