us debt problems

[jim sturtz]

DEFLATION and THE DEBT BUBBLE
You have heard me talk about this on many occasions. The bursting of the
debt bubble has not yet occurred but is a normal event following an asset
bubble bursting. I have been warning about the inevitability of this for
about a year and advising you to prepare for it. The consequences could be
catastrophic and systemic.

The worlds governments and central banks are doing what they can to
alleviate this through fiscal and monetary policy. The problem is that it
is not working. This is the most dangerous economic environment the world
has been in since the 1930's. No other environment even comes close.

During the first half of this year the concern about this died down and most
analysts assumed we were at the beginning of an economic recovery. We are
not. However, as I have written about this so much in the past this time I
will not.

Instead I have compiled 5 recent articles / reports below for those of you
interested in really understanding the current economic environment and how
dangerous the situation is. Two of the reports below are really targeted at
economists. One is from the US FED and the other is from a professor at the
University of Hamburg.

PIMCO's Paul MCculley yesterday wrote that the FED should order its member
banks to lend to companies and that the US economy is within months of
collapsing if capital borrowing does not pick up. The Federal government is
now giving money away to people so they can buy homes in an effort to keep
the economy moving while they try to figure out what else to do. The states
have been doing this for about a year. The BIS concluded yesterday that debt
levels world wide are too high. The FED paper below is a comparison of the
current US economy to Japan 1990's. And, finally the Hamburg report
concludes that there may be nothing that can be done to stop it.

I have not been sensationalizing or crying wolf as some have speculated.
There is a storm brewing that would have already arrived had the FED not
increased money supply post September 11. Are you prepared? Probably not,
most people are still in denial.

The BIS held its annual meeting yesterday in Basel
Switzerland.(http://www.bis.org/events/agm2002.htm)

A Rally Crumbles, a Debt-Doomsday Warning Appears

Despite the stock market's struggles, the hunt for a bottom continues, as
reported earlier. Something many would-be bottom pickers are missing is the
message from the bond market, which continues to suggest trouble afoot.
http://www.thestreet.com/markets/aarontaskfree/10030638.html

From Switzerland:

ECONOMY-BIS-REPORT
BASEL, Switzerland, July 8 (Reuters) - The Bank for International
Settlements on Monday sounded a cautious note on the potential damage to
economies from higher interest rates, given high debt levels, and also said
the dollar appeared overvalued according to some measures.

In its annual report, the BIS -- a bank and forum for the world's central
banks -- noted that "household and corporate debt levels in a number of the
English-speaking countries seem very high" measured against disposable
income and cash flow.
http://www.forbes.com/newswire/2002/07/08/rtr654250.html

The BIS held its annual meeting yesterday in Basel
Switzerland.(http://www.bis.org/events/agm2002.htm)

From England:

Aim of the game for the (US) Fed is to avoid deflation

The cyclical recovery in economic activity has surprised on the upside. This
might suggest that at least some of last year's interest rate cuts should be
taken back. Yet the persistent decline in equities might suggest a failure
of monetary policy to work, thereby suggesting that interest rates should be
cut even further. Put another way, should central banks be worrying about
future inflation on the back of cyclical recovery? Or should they be
worrying more about future deflation on the back of persistent asset price
weakness?
http://news.independent.co.uk/business/comment/story.jsp?story=312983

Fed Focus By Paul McCulley, July 2002

The evolving "crisis" in Corporate America is not just about a few crooks in
the executive suite, but rather too much debt relative to a "balance of
risks" tilted towards deflation.
As a practical matter, that meant, and still means today, that the Fed must
be willing to use all its powers to save capitalism from itself. Slashing
short-term interest rates, as Greenspan prudently and wisely did last year,
certainly is part of the process. But if and when the corporate lending/bond
markets start demanding that all Speculative Finance Units transform
themselves into Hedge Finance Units, the Fed must directly or indirectly
declare its willingness to "monetize" private sector debt obligations.

The direct method, of course, is to open the discount window to the
corporate sector, not just the banking sector. That is indeed a last resort
action by the lender of last resort, and should never be used, except
perhaps in times of war. Let me state for the record that I'm not
recommending it now! The indirect way for the Fed to stop a Minsky Moment
from becoming a Minsky Meltdown is for the Fed to order the banking system
to quit withdrawing from "liquidity lending." http://www.pimco.com/

Preventing Deflation: Lessons from Japan's Experience in 1990's

Board of Governors of the Federal Reserve System
International Finance Discussion Papers
Number 729
June 2002
I. Introduction and Summary
Since the beginning of 2001, the U.S. federal funds rate has been reduced
475 basis points to a level of only 1.75 percent, the lowest it has been
since 1955. Concerns have arisen that, were a substantial further loosening
of monetary conditions required, perhaps because of additional negative
shocks to aggregate demand, monetary policy would be limited by the zero
lower bound on nominal interest rates. It is debated what the Federal
Reserve could do in such circumstances to support a recovery.

In this context, many observers naturally draw parallels between the U.S.
situation at present and that experienced by Japan in the mid-1990s, when
the Bank of Japan reduced interest rates to very low levels and the economy
was on the brink of what turned out to be a protracted deflationary slump.

Following the collapse of the asset price bubble in early 1990, Japanese
growth steadily deteriorated through the first half of the 1990s, rebounded
briefly at mid-decade, but has been generally weak since then. Consumer
price inflation followed the economy downward, falling below zero in 1995.
In response, Japanese short-term interest rates were lowered nearly to zero
by late 1995 and have stayed close to zero ever since. However, with prices
declining, real interest rates have remained positive, restraining growth.
http://www.federalreserve.gov/pubs/ifdp/2002/729/ifdp729.pdf

From Germany:

What has Happened to Monetarism? Working Paper No. 347
An Investigation into the Keynesian Roots of Milton Friedman's Monetary
Thought and Its Apparent Monetarist Legacies

by Jörg Bibow University of Hamburg

Because of general deflation, the real balance effect is believed to rescue
the situation even when the system gets stuck in a liquidity trap scenario;
that is, when wage and price deflation fail to bring about relief through
falling interest rates. To someone who set out to re-establish the quantity
theory presumption that prices are anchored by the money stock, this is
clearly not the way to go. In fact, if monetary policy is so directed as to
secure price stability, as Friedman (and before him Wicksell, Fisher,
Simons, Keynes etc.) recommended it should, the real balance effect cannot
play any role whatever. It is clear, then, that Friedman had to rely on
adjustments in market rates of interest and wages to secure the system's
long-run equilibrium at full employment. Not the real balance effect but the
proper working of these market mechanisms would have to falsify Keynes's
conclusions in practice. http://www.levy.org/docs/wrkpap/pdf/347.pdf

[Bernard Thomas]

If you believe this, buy all the long-term treasuries you can at current prices of around 5%.  In Japan, long bonds have fallen to around 1% I believe.  That's not only a 400% gain, but of course you lock in the coupon interest for many years.

The risk, of course, is that the prediction is wrong and we move to period of rising inflation and rates.  While the bond market is acting strangely and not unlike it would if trying to predict defaltion, commodities markets (including gold) seem to be suggesting the opposite:  inflation ahead.

Could we be headed for "stagflation"???

[Ray]

Gee, I hardly come here anymore because everybody here is so F________
negative.

"jim sturtz" <J...@Sturtzs.Com> wrote in message
news:ecfXZgLKCHA.2736@tkmsftngp13...

[Bernard Thomas]

Not me.  I think there are some marvelous bargains in the stock market.  I just don't have any money anymore.

[jim sturtz]

:)

 

altho i might scare up a buck or 2.

 

more analysts calling for the end, gnashing of teeth, etc.  maybe we'll shortly hit our bottom.

[Darren McCormick]

does that statement qualify as being positive?

Bernard Thomas wrote:
> Not me. I think there are some marvelous bargains in the stock market.
> I just don't have any money anymore.
>
>

> *From: *"Ray" <RPo...@rochester.rr.com>
> *Organization: *Road Runner
> *Newsgroups: *microsoft.public.investor.discussions
> *Date: *Fri, 12 Jul 2002 00:09:25 GMT
> *Subject: *Re: us debt problems

[Ray]

Bernard, Well I guess I can now stop losing money in my retirement account.  This week our Cash Balance account became worth more than our balanced fund.  Basically wiping out all the gains from the 90's when it reached a value greater than 35% than the cash balance account.  I'm looking at this as perhaps another indicator that past history at least in this period no longer applies.  Both of these funds started in 1991 at the same value.  One invests 70% stock and 30% Bonds, and the other is invested in fixed T Bills + 1%.  The operating assumption is that over the long term that stocks will outperform a portfolio of either bonds or fixed investments.  Well over the past 11 years this hasn't held but well see what happens over the next cycle as we go forward since we have now re zero'ed again.

 

I agree there are some great bargains.  PFE, PAYX, JNJ to name a few.  Basically I've continued to DCA into my funds. Over the long term at some point that has to pay premiums.  Still totally on the value side as I have been for the past almost 2 years.  I think we are all waiting for the signal to start shifting back to growth.

 

I was listening to Rukeyser last night, the panel thinks there is still room on the downside (5-10%) since key support levels were broken last week.  So I'm thinking about putting in some limits at those levels on a few stocks.  In theory we should flush the rest of this corporate crap at some point and earning will turn around and the market will connect with the economic indicators.  Art Cashin talked about that the day traders and shorts are ruling the day.  Continuing to see into rally's and driving the market down especially late in the day.  Their day will pass and the bulls will again take over for the next cycle which Brinker thinks will occur within the next 6-12 months and last 1-3 years before the next down cycle.

 

While it looks like were headed for a 3rd down year I wouldn't speculate that we are going to have a triple bottom.

"Bernard Thomas" <bsth...@ix.netcom.com> wrote in message news:B9538E19.916F%bsth...@ix.netcom.com...

[Bernard Thomas]

I don't know where "the market" as a whole is going though as some have pointed out the DJIA would have to go to the 5000 range to reach the long-term trend line.  Looking at individual stocks, some of them are getting to the PE ranges I seem to recall them having 10 years ago before "the bubble".  I'm talking about bank stocks with PE's of 10 and under--that sort of thing.  Of course it is probably likely that we will over-react on the downside now as we did on the upside and how badly I can't say.

It does seem that this week it was the DJIA stocks that took the worst pounding.  Some of my NASDAQ stuff that's been slaughtered already held up pretty well.

Truth is I am not yet completely broke, but I do have better uses for the cash I can scrape together than putting it into equities--have had several bonds mature or get called and have put the money into new munis and/or more high-yield funds which seem to me a far better place to wait for this market to turn around (you collect 11-13% while you wait) than stocks.  On the other hand, I made the decision some time ago to hold onto stocks I already owned as long as the fundamentals remained solid--that includes PFE.  So I have long ago dumped the tech darlings that seemed to have shaky financials like Nortel and Corning.  I also dumped a few during the late winter rally when I thought they were experiencing a bit of residual "irrational exuberance" like AMAT, but I love the fundamentals of that one so I do have a limit buy in on it at 14.30 if it gets down there so I can put it back into my portfolio for the long term.

I am now about 60% in bonds, 5% in cash, 10% in REITs, 2% in gold funds, 2% in international small-cap funds and 21% in other stocks and funds.

This mix gives me a dividend/interest yield of about 4.2% (nearly half of it non-taxable) as well as whatever gains and losses I sustain.  And even if my remaining equities get cut in half, I think I can survive while at the same time I do have a chance to participate if there is any kind of turn-around.  I won't call it a "bull market" because I truthfully don't expect to see another bull market of the type we've seen since 1982 in my lifetime.  What I hope for is that stocks will stabilize, enter a trading range and then the best companies will resume outperforming meaning that they will show gains in proportion to their (honestly calculated) per-share earnings growth.