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Deleveraging? What deleveraging? Corporate leverage has risen at a faster rate than it did at the peak of the boom,



May 01, 2009 – Comments (0) | RELATED TICKERS: AOBC , RGR , OLN

NOTE: I am still long the gun makers (SWHC). Unfortunately, I think we are getting closer to seeing why, people are stockpiling guns and ammo. IMO, self defense and social unrest are reason enough to aquire a couple of guns and several thousand rounds of ammo. I know some gun nuts think it is about Obama and new taxes on guns/ammo, maybe it is that NOW, but self denfese and social unrest will likely move to the primary reason shortly. As an asset class, guns and ammo outperform 90% of the investments available to the general public, tax laws may change that.

I hate to copy Slycapitals complete post, but the post was on my mind and I did not want to leave anything out. Slycapital is good site I visit daily visit. (Hat tip, to Tasty, for directing me to the site)

Debt to income levels soaring

April 30, 2009 

Deleveraging? What deleveraging? Since the start of the credit crunch, corporate leverage has risen at a faster rate than it did at the peak of the boom, even as firms work hard to reduce borrowings. Companies that once embraced leverage in the name of shareholder value now find their debt piles balanced precariously on shrinking earnings. Absent a swift recovery, leverage is likely to rise even higher.

At the end of 2008, U.S. nonfinancial companies had average net debt equivalent to 3.5 times earnings before tax, depreciation and amortization, up from 3.1 times at the end of the third quarter, according to Citigroup. Yet during the credit boom, when debt was freely available, and leveraged buyouts, debt-financed share buybacks and other shareholder payouts were all the rage, leverage only reached 2.9 times in mid-2007, having risen from 2.5 times over the previous 18 months.

This is interesting on two levels. One is that all the nonsense trotted out last year about great P/E ratios should finally be obvious to all.

The second is that this gives a clue to the surprising degree of normalcy you can witness walking through a mall or going to a restaraunt. Despite the carnage we know exists very little of it appears on the surface.

MY COMMENT: I totally agree,here. I think some people cannot grasp the significance of the change that has taken place.

How are businesses and consumers pulling it off? Stanley Johnson from the old Lending Tree commercial has the answer:

BREAK========================================================= has a great read here:

Best Quotes of April 2009

Doug Casey, Casey Research
People believe they have little to lose, they’re eager to hang those they believe responsible for their problems, and they’ll listen to radical or violent proposals. We’re now just entering what will likely be the worst economic trough since the Industrial Revolution. A rioter is typically an angry person looking for vengeance because he blames someone else for his problem. So far, rioters seem to be directing their attention at governments. Correct target, of course, but they don’t have the rationale quite right. They’re not angry because governments inflated the currency, promoted fractional reserve banking, and nurtured all the cockamamie socialist programs that caused this crisis. Not at all; they rather liked all that. They’re angry only because their governments haven’t adequately protected them from the consequences of what they did. So as conditions worsen, we can expect governments worldwide to pull out absolutely all the stops to show they’re “doing something.” And round up scapegoats to satisfy the mob and divert anger from themselves. I fully expect civil unrest to spread everywhere, simply because the depression will spread everywhere. It will be worst in places that have been most overextended, most debt leveraged, most urban, and have the largest numbers of unemployed workers -- the U.S., Europe, and China.

Terry Cox, Casey Research
It’s possible to train people to be crazy. If you’re acquainted with a psychotherapist (socially, of course), ask him to explain how it’s done. Training people to be crazy wasn’t what the U.S. government set out to do when it ended the dollar’s convertibility to gold in 1973. But it turned out to be one of the results.

Untethered from the gold standard, the Federal Reserve was free to create new dollars whenever it saw fit. But the policy it drifted into wasn’t steady inflation, day in and day out, it was rescue inflation. The Fed would step up the expansion of the money supply whenever it saw a risk of widespread defaults in credit markets. The unintended effect was to train both lenders and borrowers, by repeatedly rescuing them from damaging defaults, to appraise financial risk unrealistically and to regard what is in fact a source of danger as a manageable nuisance. It made the managers of financial institutions functionally crazy, and the longer rescue inflation continued, the worse they got. (When you read about investment bankers running a business with 30-to-1 leverage and tell yourself, “Those people must be crazy,” you’ve got it about right. But they weren’t born that way. They were trained.)

Karen De Coster,
The other prime mover spurring claims of sovereignty on the part of states is rejection of the Federal Reserve and its illiberal policies that enslave the citizens of states by locking them into its inflationary fiat money machinations and debases their currency. Legislators in some states, such as Georgia and Montana, have agitated in favor of throwing off the Federal Reserve in favor of instituting a sound money policy advocating the use of gold and silver as opposed to the Fed’s legal tender notes. In Montana, Representative Bob Wagner introduced a sound money bill (HB 639), though it later died in committee along partisan lines. As times go on and the economic landscape becomes even gloomier, we are more likely to see many more of these kinds of initiatives on the part of state legislatures.

Gold, as such, is a tool for protection against the collapse of the dollar, which is why opponents of the Federal Reserve desire to buy it and hold it. Guns are the tools with which you defend yourself, not only from the local criminal who wants what you have, but even more so, they provide free men with the capability for physical resistance from a federal government whose expansion of powers and oppressive tactics are out of control. Think Rahm Emanuel and Eric Holder, and ask why it is that they champion an agenda that puts guns only into the hands of the government and its approved agents.

Jeffrey Goldberg, Atlantic
It turns out that my crucial mistake was believing that the brokers and wealth managers and cable-television oracles who make up the financial-services industrial complex actually had my best interests at heart. Or so say the extremely smart—and wealthy—people I asked to help me figure a way out of my paralysis. One of these people was Robert Soros, the deputy chairman of the fund started by his father, George. I went to see him at his office, where he spent two hours performing an autopsy on my assumptions.

“You think a brokerage should be a place you go to pay commissions for fair and unbiased advice, right?” he asked.

“Yes,” I said.

“It’s not. It never has been.” He then cited another saying of Buffett’s:

“‘Wall Street is a place where whatever can be sold will be sold.’ You are the consumer of their dreck. What they can sell to you, they will sell to you.”

“But they told us—”

“They lied.”

He went on: “You should be disheartened and disappointed. But don’t kid yourself. You’re a naive capitalist. They were never your advisers. Do not for a moment think that a brokerage firm is your friend.”

“So who’s my friend?”

“You don’t have one. This is the market.”

“Okay, that’s Merrill Lynch. What about the others?”

“They’re not your friends,” Soros said patiently.

Eric Janszen, iTulip
Deflation expectations have over the past two quarters become so deeply embedded in investor’s minds that they now see a deflationary pricing environment persisting for decades, this despite the fact that only a year ago they could not shake the prospect of ever rising inflation, fed as it was by cost-push energy import prices, in turn driven by a weak dollar. Markets also expect central banks, as the economy climbs out of recession, to move quickly to respond to any sign of inflation with rate hikes before inflation price cycles set in.

In other words, the vast majority of investors believe that central banks and governments have so fine tuned fiscal stimulus and monetary policy that the economy can grow out of recession without significant inflation and also that our government is willing to risk sending the economy back into recession in order to halt inflation, if it re-emerges.

We think investors have it wrong again. Big time. We see a collective miscalculation as great as 1981, but in reverse.

We believe the current Fed and administration will embrace a nominal economic recovery, even if real growth is negative, that is, even at the cost of high inflation. As usual, the inflation will be hidden by the government’s inflation data indexing and computation methodology, but evidence will appear all around us.

James Kunstler
My guess is it will first take the form, sometime after Memorial Day (but maybe sooner) of wholesale liquidations of everything under the North American sun: companies, households, chattels, US Treasury paper of all kinds, and, of course, the S & P 500. We'll soon find out whether an organism the size of the United States can run an economy based on one family selling the contents of its garage to the family next door. My guess is that this type of economy won't support the standards of living previously enjoyed in places like Dallas and Minneapolis. 

The socio-political fallout from the inherent anger and disappointment in all this is liable to be severe. The public is already warming up for it, with cheerleaders such as Glen Beck on Fox TV News calling for the formation of militias, and gun sales moving out-of-sight. One mistake that the banking elite and their lawyer paladins made the past decade was their show of conspicuous acquisition -- of houses especially -- in easy-to-get-to places where anyone can see them, for instance an angry mob in Fairfield County, Connecticut, or Easthampton, New York. Unlike the beleaguered elites of South Africa (where I visited recently), who live behind layers of fortification, the executives of Citibank, Goldman Sachs, J.P. Morgan, and a long list of hedge funds, will be found cringing in their wine-lockers behind a measly layer of privet hedge when the tattooed minions of Glen Beck come a'calling. 

This could perhaps be avoided if someone in authority like US Attorney General Eric Holder took an aggressive interest in the multiple swindles of the decade past, and commenced some prosecutions. But the window of opportunity for this sort of meliorating action may close sooner than the government and the mainstream media believe. Social phase-change, as in the formations of mobs, is nothing to screw around with. Once the first window is broken, all bets are off for social stability. My guess is that the various bail-out gifts to the bankers are long past having gone too far in the eyes of this increasingly flammable public.

We have no previous experience with this type of social unrest. The violence of the Vietnam era will look very limited and reasonable in comparison -- in the sense that it was an uprising on the grounds of principle, not survival. And the Civil War was a wholly regimented affair between two rival factions. This time, people with little interest in principle beyond some dim idea of economic fairness, will be hoisting the flaming brands out of sheer grievance and malice. By the time [Goldman Sachs CEO] Lloyd Blankfein sees the torches flickering through his privet, it will be too late to defend the honor of his cappuccino machine.

The rest is here:

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