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Don't Make the Same Depression Mistakes...

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October 18, 2008 – Comments (7)

Yves has a post showing the degree that government is following the same path as during the depression.

This crap about the need to get lending happening again is, well, it is crap.  Debt needs to be reduced.  Too much of the economy is being raped to pay debt servicing costs.  Significant portions of the debt out there will already never be repaid.

 

John Mauldin has a post that shows how analysts earning estimates have changed.  Well, it has a lot more then that, but that's the part that caught my attention, it is about 2/3rds-3/4rds down.  They've gone from $92 to $55.  The estimates for 2009 have gone from $81 to $48.  Mauldin suggests that earnings can go lower then these estimates, which was my thoughts as well. 

Every business going has had huge input cost increases which is going to squeeze margins.  Business that have debt to roll over are going to see debt servicing costs go up which is more pressure on margins.  Unemployment is going up so reduced buying power is another pressure on margins.  They raise prices and they have to deal with reduced sales due to consumers either not buying or substituting cheaper goods.  These are huge.  Add to that all the dividend cheques that have been cut.  Add to that that exports should weaken with the renewed strength in the US dollar.  Indeed, there is going to be massive surprise earning shortfalls because of the strengthening US dollar.  International companies had huge earning surprise from the decline of the US dollar and now it will be an opposite surprise.

The good news is that commodity prices have retracted so input costs will actually decline.  How much good it does is really going to depend of their level of debt and how much overall sales volume changes due to the economic slow down.

 

7 Comments – Post Your Own

#1) On October 18, 2008 at 11:54 AM, dwot (41.46) wrote:

Winter is here...  I took this yesterday...  -10 out there...

First snow

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#2) On October 18, 2008 at 1:41 PM, rebelseeker (92.29) wrote:

  Consumer disposalable income has been decreasing for a while.  Consumer debt increase further reduces disposable income.  Average wage increase has not kept pace with true inflation thereby further reducing disposable income.

If you look at data from http://www.monthlyreview.org/docs/0506tbl1.pdf it shows debt numbers as percent of dispoable income.  With these numbers you debt > income. 

To pay our debts we work to produce products or services for an exchange medium (cash-dollars) so we can obtain object/services we need or desire.  When we max out credit we must pay down debt and if income does not rise above inflation then we are forced to scale back our desires and buy only what we need & truely desire (if afforadable).

People who have been hit buy high debt or those who know true cost of debt are not in any hurry to add to it. Many are cutting back working to reduce and eliminate debts.  This decrease in consumer spending effects economy & financial industry.

An analogy I use is ......A kid eats a lot of candy.  The child gets sick and stops eating.  As the child gets better he/she may in couple days start eating some candy again; but will most likely avoid over eating again

The government solution is to provide more candy (cheap money).  Banks have taken a lot more money from fed window than they are lettering out.  People are borrowing less.  Intrest savings rates are extremely low giving no incentive to deposit  money into savings accounts.

The historical result of this is inflation.  Hang on kiddies cus next year inflation is going to jump.   When that happens intrest rates will rise giving us a not so nice 70's - 80's style recession.

Stagflation anyone?

Look at past history of 70 - 80's recssion, and after math of S&L decale; you will see what may be coming down the road.

The economic recovery is at least a year away

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#3) On October 18, 2008 at 1:47 PM, jgseattle (33.69) wrote:

Just a little note about the public debt.  The servicing cost of the US debt is $456B.  At $10T or so that is an average of 4.56%.

The way the US government has reduced interest payments is to shorten the average life of the debt.  So now, I think this is the correct number but may be off 5%, 47% of the debt comes due in less than 5 years.  (anyone have the exact number?)

So why is this important?  I think inflation is coming.  The last time this happened was in the late 1970s early 1980s at which time the majority of federal debt was financed long term so when Volker raised rates to 17% it did not cause the debt service to increase a lot/as much as it will today.

So if you think inflation is coming as I do what do you do.  Buy gold.  The other thing believe it or not is get into more debt since the dollar you barrow today is worth more than the dollar you pay it back with in 10 or 15 years.  (of course whatever you spend the money on has to be a long term cash producing asset, and you have to be able to service the debt thru a downturn) 

 

 

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#4) On October 18, 2008 at 1:53 PM, rebelseeker (92.29) wrote:

  Consumer disposalable income has been decreasing for a while.  Consumer debt increase further reduces disposable income.  Average wage increase has not kept pace with true inflation thereby further reducing disposable income.

If you look at data from http://www.monthlyreview.org/docs/0506tbl1.pdf it shows debt numbers as percent of dispoable income.  With these numbers you debt > income. 

To pay our debts we work to produce products or services for an exchange medium (cash-dollars) so we can obtain object/services we need or desire.  When we max out credit we must pay down debt and if income does not rise above inflation then we are forced to scale back our desires and buy only what we need & truely desire (if afforadable).

People who have been hit buy high debt or those who know true cost of debt are not in any hurry to add to it. Many are cutting back working to reduce and eliminate debts.  This decrease in consumer spending effects economy & financial industry.

An analogy I use is ......A kid eats a lot of candy.  The child gets sick and stops eating.  As the child gets better he/she may in couple days start eating some candy again; but will most likely avoid over eating again

The government solution is to provide more candy (cheap money).  Banks have taken a lot more money from fed window than they are loaning out.  People are borrowing less.  Intrest savings rates are extremely low giving no incentive to deposit  money into savings accounts.

The historical result of this is inflation.  Hang on kiddies cus next year inflation is going to jump.   When that happens intrest rates will rise giving us a not so nice 70's - 80's style recession.

Stagflation anyone?

Look at past history of 70 - 80's recession, and after math of S&L debacale; you will see what may be coming down the road.

The economic recovery is at least a year away

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#5) On October 18, 2008 at 3:55 PM, DemonDoug (80.85) wrote:

stagflation for sure.

btw your point about debt is a great one.  This is why I have been screening for stocks that have either little or preferably no debt.  Interestingly enough, names like GOOG, AAPL, and MSFT come up in those screens.

It's going to be almost 90 here in LA.  Glad I'm here and not there!  Summer seems to be never-ending this year though and I'm ready for it to be over.

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#6) On October 18, 2008 at 8:22 PM, barman8 (42.30) wrote:

Dwot    what say you about AIG, can i prosper holding alot of shares,???    

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#7) On October 18, 2008 at 10:57 PM, dwot (41.46) wrote:

Seattle, I thought a lot of the debt was financed for 30 years, which is good for government but bad for whom ever is holding the debt.  I think they've been having problems selling longer term debt lately, but I thought that has only been the past year or so.

I think you have way more competition for jobs these days to it won't be the "stagflation" of the 70s and therefore I disagree that having more debt would be beneficial.  Seeing wages go up and the ratio of debt cost decline never happened in my life.  Rather wages were flat and all other costs were increasing around it and every year the budget got tigher and tigher.  I was always conservative about debt and in a rush to pay it back and that truly was the best move.

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