Doom and fear seem to be making the rounds this week as they are always compelling and there are reasons to be concerned. One thing that you have probably read a couple of times is that with budget deficits of $1.4 trillion and deficits likely to be in that neighborhood for years to come it means that the US must issue more debt to fund that gap.
I read something the other day about this (apologies for not having a link) that made intentionally heroic assumptions to get to US investors buying up $500 billion of that through savings and then questioning where $900 billion of more demand will come from and if there is enough demand, where will it come from next year?
Perhaps softening the blow a little is that included in these numbers is very short term debt rolling over very frequently which will soak up some portion of the supply–simple replacement– but clearly replacing paper that rolls over regularly will not solve the problem. The numbers are daunting. China, for all the talk will buy a lot of the debt issued but we can’t know how much or whether it will equal the US debt they have bought in recent years and keep in mind the US is going to be issuing more debt than before.
Next on the doom parade is the latest letter from Jeremy Grantham (here is one link) with perhaps the big takeaway being his theme of seven lean years meaning poor equity returns for that time. The bull market from 2003-2007 was also lean by historical standards. According to past commentaries from John Hussman the average bull market goes up 180% but that one only went up about 100% so lean would not be new and there were a couple of decent years in there and of course the returns in things like emerging markets and commodities more than made up for the leanness provided people had exposure.
The next nugget of doom comes from Marc Faber by way of the Daily Pfennig;
“The dollar will become worthless when people eventually realize the fiscal situation in the U.S. is a disaster. It will go to a value of zero eventually, but not right now. Looking at Mr. Obama’s administration, it should already be there.” He went on to say…
“In my opinion, about 50% of tax revenues will be used just to cover interest payments on the government debt. That’s unsustainable. Then you’ll really be forced to print money. The best investments right now are foreign currencies, commodities, and equities.” And then when asked about Fed Chairman, Big Ben Bernanke, Dr. Faber said, “He’s a money printer. He’s nothing else.”
Zero is hyperbole (insert nervous smile) but the notion of interest payments increasing to account more of the country’s expenses in the future like above, is daunting and not something that will sort itself out in a couple of weeks. I do not know how to solve these problems. Obviously higher interest rates help with creating demand for US debt but cause all sorts of problem here on the ground. Personally I lean toward the tough medicine path to make the pain short and sharp as opposed to chronic and open ended. These thoughts of course are simplistic and as a country we lack the political will to make any tough choices.
Here is a little more fun from David Roche in the FT.
One important thing to remember in this context is that interest rates are very low by historical standards. This means prices are very high. Of course prices don’t have to ever go down, for now this is unknowable, but you can know that prices are high. It would be great to be able to solve the world’s problems but in lieu of that you can protect what you have which, again, means more non-dollar exposure. The idea of sidestepping most of this is very compelling.