Juggling Dynamite

We live in a surreal world today.  Leverage has mounted in our financial system so much over the past 30 years, that today we toss around talk of billion, trillion and even quadrillion in order to express the state of the world economy and our staggering indebtedness.  In every day terms this many zeros can seem incomprehensible.  This morning a client sent me the following summary of US debt and spending stats both in actual digits and then again with zeros knocked off so that we can see the math on an everyday household level (thanks Jerry):

* U.S. Tax revenue: $2,170,000,000,000
* Fed budget: $3,820,000,000,000
* New debt: $ 1,650,000,000,000
* National debt: $14,271,000,000,000
* Recent budget cuts: $ 38,500,000,000

Let’s now remove 8 zeros and pretend it’s a household budget:

* Annual family income: $21,700
* Money the family spent: $38,200
* New debt on the credit card: $16,500
* Outstanding balance on the credit card: $142,710
* Total budget cuts: $385

In this way I think we can easily appreciate how unsustainable this financial behaviour would be for a family, and ergo for a country.

It is also important to note two other key points in this. First these unsustainable ratios are not unique to only America, but are common through most of the western world today. And second, the above planned budget expenditures do not include the trillions in unfunded health and social security benefits which most western countries have promised to their now rapidly aging populations.

The math says cuts across the board for all government programs and entitlements. It also says zeros will have to be cut off current debt obligations. This means those presently holding many sovereign bonds and banks will have to lose money.

Back to the email forwarded from my client:

Here’s another way to look at the Debt Ceiling:

Let’s say, You come home from work and find there has been a sewer backup in your neighborhood….and your home has sewage all the way up to your ceilings.

What do you think you should do ……

Raise the ceilings, or pump out the poop?

As North American markets remained closed today, European stocks got straight to work on a  hope-filled rally to start off the New Year.  Meanwhile the generally more sober bond and currency markets did not follow suit with Euro yields rising and the Euro falling.

As this latest update on the Euro shows us though, technically 1.30 is not really key support.  1.39 to 1.41 were much more critical and we are well below there now.  This unwinding of the latest carry trade, suggests further downside for stocks, further upside for the US dollar. 

Source:  Cory Venable, CMT, Venable Park Investment Counsel Inc.

Over the holidays I have had a chance to catch up on some of my reading list.  Every so often I come across a book I wish I had written-other than the Harry Potter series for obvious reasons–the latest book by Robert Frank is one of them.  Everyone should read this book:  The High Beta Rich–How the manic wealthy will take us to the next boom, bubble and bust. 

It is immensely entertaining.  Great real life stories that help us understand or remember the classic risks of money, the world we have lived in for the past 30 years, and the ramifications and opportunities this presents for those who are low-debt, liquid and prepared going forward.

It seemed particularly relevant that I finished this book while staying in a beautiful, fully equipped sprawling mediterranean home that we rented in the Camelback mountain area of Scottsdale this holiday for a very modest rate.  (a cheaper weekly rate for our family than staying at a hotel, even booking through a discount travel site). Our rental was a beautiful compound of peace and tranquility.  But the neighbourhood was truly surreal mansions that were selling for 10-30 million at the peak in 2008 and are now valued 50 and 60% lower.  Amazing indulgence in non-productive, conspicuous consumption–20,000 to 50,000 square foot homes.  Way too much house for pretty much anyone when it comes to upkeep, maintenance, taxes, energy consumption.  But an amazing reference point for Frank’s great book.  We humans sure are a curious little species.