2012 has come and gone with investors “marking time” yet again. Equity investors are now a full 13 years into this process of spinning their wheels and treading water while Washington and Wall Street (CNBC) prod them along with promises that “this is the year” to make everything right. In fact, I cannot remember a time when complacency has been at such levels. Don’t get me wrong, I know that volume is down and retail trade has slowly and methodically been exiting the markets for a couple of years now but this must be viewed in the context of the “financial backdrop.” Margin debt is again at record highs and those remaining “in” the market are bullish like it’s 1987 all over again. Complacency reigns because… well… because “they” will never allow anything bad to happen.
We are about to find out that BROKE (as opposed to “don’t worry be happy”) is the operative word here, it includes more than you might think and in record setting fashion. Let’s start with the individual. There are now more people on food stamps than ever before. There are more people receiving SS disability and retirement benefits than ever before. There are now cumulatively more foreclosures, more negative equity situations, more delinquencies and less equity as a percentage of the whole over the last 5 years than during any period in U.S. history. Underemployment is possibly as bad now as it was in the 1930’s and is for sure if you factor out “those employed by the government.” Put bluntly, the private sector as represented by individuals has never been weaker, nor has this sector relied more heavily on the federal government than it does now.
Then we have the state and municipality sectors which speak for themselves. Several states themselves are on death’s financial door while municipalities who are taxing real estate at all time highs are still not making ends meet. It is interesting that these entities are also huge “employers” who are running deficits just to make payroll.
The corporate sector is next, this sector has been cutting fat for 20 years and is now carving bone. In many cases, just to “make the numbers” for the current quarter accounting “tricks” are being used. No sector is more obvious than the banking sector. FASB was thrown out the door so that they could mark any “asset” to any price that they wish. The banking system is pure fantasy while people still sleep well in the knowledge that they have “money in the bank.” “Who cares” whether the bank is broke or not? FDIC insures your deposits so… go back to sleep!
Holding all of this financial trickery together is of course the Federal government. They spend 8-10% more, every year, year after year than they take in through taxes. This “extra” that they spend each year counted as “growth” so that “no recession” was the official mantra. The Treasury could cut out ALL discretionary spending and yet still be running a deficit. They are sitting on $16 trillion of debt and another $100+++ trillion of future promises and guarantees. Mathematically it is now clear that even with 0% interest rates forever, the debt cannot be paid back much less than if interest rates were normalized and traded at 2% above inflation.
I could go on and on sounding like a broken record but you have heard it all before, the bottom line is that everything “paper” is broken, insolvent, fully levered many times over and worth nothing. Yet… here we are on New Years eve sitting back and wondering “what’s for dinner.” My point is this, “We have already been slowly boiled. WE are what’s for dinner!” By never rocking the boat, our politicians “did it” and we allowed it to happen! This did not have to happen, we as a nation could have dealt with it back in 2001-02 and now be on a solid footing but no, no recession was ever allowed to go to fruition and “cleanse” the system since Paul Volcker had the helm in 1980-82.
We lived beyond our means for 40-50 years and were rarely allowed to see the ugly reality, we were “coddled.” Now, the ability to hide reality is gone and the result will be a double whammy. First, because we lived so many years beyond our means we will need to spend x amount of years living below our means, this part is just pure Mother Nature. Secondly and probably more important “mentally,” “we are Americans” and are accustomed to, used to, better yet, DESERVE the good life!
The “fantasy” is over yet “life as usual” is still expected to continue. Idiots of all sorts lined up outside of stores before Christmas to get “good deals,” CNBC tells us to “rise above” and the politicians provide “theater” that even the ancient Romans would have been enthralled with. I hate to be the bearer of bad tidings (truth) but IT’S OVER! Reality is about to arrive in full force and as I have been trying to impress upon you for several years now, the reality of the situation that we now find and allowed ourselves to avoid for so long… sucks! Maybe just maybe we will get a deal and be “saved” …again. The markets may even celebrate and the Cramers of the world will start screaming BUY BUY BUY! It does not matter because the reality is the reality! “Broke” is broke and no amount of tricks, financial and accounting gimmickry or anything else can or will change this. I will guarantee you one thing, once this whole charade finally comes to a head a HUGE majority of the population will wake up saying “how could this have ever happened? …it’s so obvious that you cannot spend more than you make!”