Thursday, December 18, 2008

The Debt Bubble is Getting Really Heavy!

Good Afternoon Folks

Well that was interesting. Stocks were down about 2% as fears continue to mount around how severe this recession will be.

The GE news was really pressured the markets this afternoon:

"Dec. 18 (Bloomberg) -- General Electric Co., the biggest issuer of corporate bonds, has a one-in-three chance of losing its AAA credit rating in the next two years as earnings deteriorate, Standard & Poor’s said.

S&P cut the outlook on the company and that of its GE Capital finance arm to negative from stable. While the AAA ratings were left intact, S&P said in a statement today that it was concerned about cash flow and funding for the finance unit as global conditions worsen. GE Capital’s stand-alone rating, without parent support, would be A+, it said."

Quick Take:

This one was a shock to me. GE is supposed to be the "Taj Mahal" of corporate America. It was built into a corporate powerhouse by icon CEO Jack Welch. To see them face a 1 in 3 chance of losing their AAA rating is astonishing. The problem GE has is almost half of the companies revenues were generated by GE capital. As Wall St started to melt down, GE went down with the ship.

Folks, I am beginning to realize that almost everyone in the world got completely addicted to "cheap" money. It wasn't only Wall St. Everyone got into the game: Pension funds, college endowements, automotive finance, money markets. Our recent GDP growth in the last 10 years was almost solely based on creating debt. Once everyone filled themselves to the gills with it, the game was over.

Debts must be serviced via payments. When it can no longer be serviced it must be defaulted on. I will bring this chart up again folks. Look how out of hand borrowing got compared to GDP:

Quick Take:

The amount of debt we have created vs. GDP is unsustainable because we use GDP to pay back debt! Our debt load is now 300%+ of GDP. Our current "crack cocaine" debt party makes 1929's debt party look like more like a soda and pizza party for a bunch of 3rd graders!

This is unsustainable folks! The Fed is going to try and continue blowing up this bubble by selling homes at 4% interest rates. If you buy a home based on this new Ponzi scam you are crazy! Buying a home using this mortgage plan is too big a risk on such a large investment. I say this because the rules constantly change. You can rest assured that rates cannot stay this low for a sustainable period of time. Inflation could rear its ugly head at anytime which would force the Fed to raise rates. What if mortgage rates rise to 6% 5 years from now? The price of your home will go down the toilet!

Another risk you run is low interest rates do not guarantee that home prices will stop sliding. What if they continue to plummet as the economy continues to fall apart? Home prices continued to drop when Japan attempted the same thing. Buying at these levels with such risk is simply too dangerous. We still haven't seen the "unintended consequences" of what the Fed has just done. Maybe today's drop was the start of something. I guess we will know soon enough.


I got the new GEAB report courtesy of Alex who is one of our readers. Thanks Alex! They are out with some more dire predictions. They have a great chart that shows you how insanely out of whack the stock market is versus its historical average:

More from the GEAB:

"LEAP/E2020 anticipates than the unfolding global systemic crisis will experience in March 2009 a new tipping point of similar magnitude to the September 2008 one. According to our team, at that period of the year, the general public will become aware of three major destabilizing processes at work in the global economy, i.e.:

• the length of the crisis

• the explosion of unemployment worldwide

• the risk of sudden collapse of all capital-based pension systems

A whole range of psychological factors will contribute to this tipping point: general awareness in Europe, America and Asia that the crisis has escaped from the control of every public authority, whether national or international; that it is severely affecting all regions of the world, even if some are more affected than others (see GEAB N°28); that it is directly hitting hundreds of millions of people in the “developed” world; and that it is only worsening as its consequences reveal throughout the real economy. National governments and international institutions only have three months left to prepare themselves to the next blow, one that could go along severe risks of social chaos. The countries which are not properly equipped to cope with a surge in unemployment and major risks on pensions will be seriously destabilized by this new public awareness.

Moreover no one should imagine that the improvement at the end of 2010 will correspond to a return of high growth. The recovery will take long. For instance, stock markets will take a decade to return to levels comparable to 2007, if they ever return to that. Remember that it took twenty years before Wall Street resumed its 1920 levels. Well, according to LEAP/E2020, the present crisis is deeper and longer than in the 1930s. The general public will gradually become aware of the long-term aspect of this crisis in the coming three months and this situation will immediately trigger two tendencies carrying with them socio-economic instability: fear of the future and enhanced criticism towards leaders.

Finally, among the various consequences of the crisis for dozens of millions of people in the US, Canada, UK, Japan, Netherlands and Denmark in particular (3), there is the fact that, from the end of the year 2008 onward, news about major losses on the part of the organizations in charge of managing the financial assets supposed to finance pensions will multiply. The OECD anticipates that pension funds will lose 4,000 billion USD in 2008 only (4). In the Netherlands (5) as well as in the United Kingdom (6), monitoring organizations recently blew the whistle asking for an emergency contribution reappraisal and a State intervention. In the United States, growing numbers of announcements call for contribution increases and benefit reductions (7).

All the trends described above are already at work. Their combination and the public becoming aware of the consequences they could entail, will result in the great collective psychological trauma of Spring 2009, when everyone will realize that we are all trapped into a crisis worse than in the 1930s and that there is no possible way out in the short-term. The impact on the world’s collective mentalities of people and policy-makers will be decisive and modify significantly the course of the crisis in its next stage. Based on greater disillusion and fewer beliefs, social and political instability will settle down worldwide."

Bottom Line:

Quite a startling report isn't it? The bottom line here folks is be prepared. Raise cash, pay off debt, and pullback on non discretionary spending. You are going to need the money later.

Everything I am now reading now suggests that 2009 will be a sight to behold. I am convinced its going to take a decade or more to get out of this. The Fed is out of bullets. They have taken rates to zero, and their balance sheet is starting to look as bloated as Rosie O'donnell stomach after Thanksgiving dinner.

O'bama will come out with a stimulus in January but it will be nothing but a short term fix. Building infrastructure is great, but when its done we are left with a bad economy with nice highways.

Watching the Fed delay the bursting of the bubble is excruciating to me. Its like watching a doctor holding a needle one inch from your arm and freeze. Give me the dam shot and lets move on from this! Do the math above folks.

The debt game is history and so in our economy.


Anonymous said...

"You cannot be assured that rates cannot stay this low for a sustainable period of time."

You mean you cannot be assured that rates CAN stay this low...

Your fractured syntax makes for difficult comprehension sometimes.

Jeff said...



Thank you for pointing this out. Your correction is exactly what I meant. I was short on time today.

Please don't ever hesitate to correct my mistakes.

Somedays I don't have the time to proof like I prefer.

Jeff said...


Look at crude today. Down to $33.40!

I don't see how the Middle East can support their economies at this level.

Not a good sign from an economic stanpoint. Could this drop into the teens? Not out of the question as far as I am concerned.

Pretty pathetic move higher on the auto bailout news. Stocks are up only 1%.

Opex expiration today so the afternoon will be interesting to watch.

Anonymous said...

Do you see that the GEAB is also predicting that the US Government will default before the end of the summer of 2009? Scary stuff. I hope they are more Chicken Little than they are prescient for all of our sake.

Jeff said...


What scares me is they have been pretty spot on since this mess started.

Lets hope they are wrong on that one!