This week has seen a sudden concern in media outlets over what might happen to regular people’s investment accounts if the US government does not come to an agreement to raise the debt ceiling and the US ends up temporarily unable to pay interest to its bondholders. A host of international authorities are issuing formal statements urging Congress to come to a consensus and raise the debt limit without further delay or else. Unfortunately in a world full of debt abusers, no country has much credibility in demanding or recommending fiscal responsibility to another. The fact is that a co-dependent world economy needs US spending in whatever form that ends up going forward. And for the foreseeable future, that spending will necessarily be diminished by the weight of record public and household debt.
This is the well-worn historical cycle from reckless spending to forced austerity as balance sheets heal and financial strength is slowly built back up in reserve to fuel future boom times. In the meantime though, less spending in the US will mean less capital flowing into other countries and even less growth for a world economy that is today already growing at less than 3% in 2013. This should be compared with more than 5% global growth at the peak of the consumer credit bubble in 2007.
But for those with savings to lose, the investment risk today is not that politicians will make bad, short-term focused choices–they have been doing that for decades hence the mess we are presently in–or that the world will end if the US delays or even defaults on some bond payments. The investment risk for savings today remains that 13 years into the secular deleveraging process since the tech bubble peak in 2000, risk assets are again priced on the expectation of future demand growth that is simply not possible to sustain.
Stocks are some 40% over-valued today thanks to over-optimistic buyers paying more and more for corporate earnings that have been inflated 70% above historic means over the past couple of years via low labour costs, share buybacks and other accounting maneuvers. All of these tricks will be increasingly difficult to maintain in the face of falling corporate revenues. The fact is that abnormally high profit margins since 2009 have been an historical anomaly only possible thanks to excessive consumer and government spending on debt that was only available on a temporary basis through the “miracle” plague of debt securitization and then excess liquidity available from “emergency” Central Bank “rescues”.
The risk to savings in risk markets today is clear and present danger to those who cannot or do not wish to endure another damaging bear market. This is not a reason to panic or stick one’s head in the sand of disbelief. But it is a perfectly rational reason to take proactive steps to lower risk exposure before the downdrafts hit.
Sadly as in 2000 and 2007 most financial advisors and desperate souls who are still clinging to the reckless roller coaster of stock markets today, have no risk management plan at all, and so are destined to lose heavily and then bail to cash near the next cycle bottom ahead just as they did in 2002-03 and 2008-09. I was explaining all of this on CKNW Morning News with Phil Till this morning. You can listen to the segment in the audio archive here on the CKNW web site by selecting Oct 8, 7am and advancing to 10:00. Needless to say my comments were pretty much the antithesis of what the long always, risk seller guests had to say.
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