THE MARKETS
"Hot potato" is a favorite children's game. Unfortunately, as
adults, we're playing an economic version that has the potential
for much more serious consequences.
It started with consumers going into debt over their heads to
help fund an ever-increasing lifestyle.
For example, total household debt rose from $1.1 trillion in
1978 to $13.5 trillion at the end of 2009, according to the Federal
Reserve. That's more than a 12-fold increase over the past
31 years. By contrast, our economy, as measured by gross domestic
product, grew from $5.3 trillion to $13.3 trillion during that same
period--a more modest 2.5-fold increase, according to the
Department of Commerce.
Then it moved to the financial sector racking up huge
liabilities on the back of newfangled derivative securities.
Total financial sector debt, which includes various
government-related enterprises and private financial institutions,
rose from $0.4 trillion in 1978 to $15.6 trillion at the end of
2009, according to the Federal Reserve. That's a 39-fold
increase over the past 31 years. With this high leverage, is it any
surprise that our banking system nearly went kaput in 2008?
Then it moved to the local, state, and federal governments
incurring unsustainable debt to keep the world economy from
collapsing.
Total U.S. local, state, and federal governmental debt rose by a
factor of 11 from 1978 to 2009, according to the Federal
Reserve. Overseas, the picture looks bleak, too, as many of the
European Union countries are sitting on huge piles of IOUs that
look increasingly less likely to be paid back in full. Not
surprisingly, gold prices hit a record high last week as people
turn to the perceived safety of the yellow metal in times of doubt,
according to the Financial Times.
With the potato of debt having passed from party to party over
the past three decades, the financial markets are now saying the
potato stops here. As John Mauldin, president of Millennium Wave
Advisors, LLC, says, "You don't cure a debt problem with more debt
unless you have a clear path to grow your way out of the debt." In
the U.S., we can grow through population growth and productivity
gains. That, coupled with higher taxes and lower spending, may do
the trick. In Europe, structural headwinds make the growth story
much more difficult and that's partly why the value of the euro is
declining and street protests are rising.
How this unwinding of debt plays out with the world populace
will likely affect the financial markets for years to come.
|
Data as of 3/12/10
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500
(Domestic Stocks)
|
2.2%
|
1.9%
|
28.6%
|
-8.9%
|
-0.5%
|
-2.4%
|
|
DJ Global ex US
(Foreign Stocks)
|
2.6
|
-6.4
|
23.6
|
-10.6
|
3.0
|
0.8
|
|
10-year Treasury Note
(Yield Only)
|
3.4
|
N/A
|
3.1
|
4.7
|
4.1
|
6.5
|
|
Gold
(per ounce)
|
2.8
|
12.0
|
33.6
|
22.6
|
24.1
|
16.2
|
|
DJ-UBS Commodity Index
|
-0.6
|
-8.1
|
6.4
|
-9.5
|
-2.7
|
2.2
|
|
DJ Equity All REIT TR Index
|
3.7
|
14.3
|
70.5
|
-9.0
|
3.4
|
11.2
|
| Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS
Commodity Index returns exclude reinvested dividends (gold does not
pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT TR Index does include reinvested
dividends and the three-, five-, and 10-year returns are
annualized; and the 10-year Treasury Note is simply the yield at
the close of the day on each of the historical time
periods.Sources: Yahoo! Finance, Barron's, djindexes.com, London
Bullion Market Association.Past performance is no guarantee of
future results. Indices are unmanaged and cannot be invested into
directly. N/A means not applicable or not available. |
WHAT IS ONE OF THE BEST INVESTMENTS you can
ever make? No, we're not talking about the stock market,
commodities, or gold. Instead, we're talking about investing in
your own education. As the chart below shows, there is currently a
direct correlation between the level of formal education and the
unemployment rate. The more educated you are, the less likely you
are to be unemployed.
|
Educational
Attainment
|
Unemployment
Rate
April 2010
|
|
Less than high school diploma
|
14.7%
|
|
High school graduate, no college
|
10.6
|
|
Some college or associate degree
|
8.3
|
|
Bachelor's degree and higher
|
4.9
|
Source: Bureau of Labor Statistics
The fact that the most highly educated people in our population
have a relatively low unemployment rate of 4.9% may help explain
why consumer spending hit an all-time high in March, according to
MarketWatch. People with a higher education tend to earn more and
since 95% of that demographic is employed, that has helped
reinvigorate consumer spending.
The overall unemployment rate of 9.9% is unacceptably high and
understandably grabs the headlines, but looking at the composition
of that number suggests the damage to the economy might not be as
bad as first thought. Digging beneath the headlines like this helps
us make better assessments of the current economic and investing
environment.
For your convenience the sources
have been listed below:
www.marketwatch.com/story/the-second-debt-storm-hits-nations-2010-05...
www.federalreserve.gov/releases/Z1/Current/z1r-2.pdf
www.bea.gov/national/xls/gdplev.xls
www.bls.gov/news.release/empsit.t04.htm
www.ft.com/cms/s/0/c43cc5fc-5d2b-11df-8373-00144feab49a,dwp_uuid=4...
www.safehaven.com/article/16808/europe-throws-a-hail-mary-pass
www.marketwatch.com/story/consumer-spending-surpasses-pre-recession-p...
thinkexist.com/quotation/it-s_a_shallow_life_that_doesn-t_give_a_person_a/3...
