“A clever person solves a problem. A wise person avoids it.”
There is a big difference between levered and unlevered growth. There is an even bigger difference between growth manufactured by a levered government dollar and private one. Leverage can work both ways. Leverage can also blow you up.
There is a time to take on leverage. There is a time to avoid it. The Fiat Fools of a failed Keynesian ideology of massive government debt financed deficit spending are learning this lesson the hard way. An American or Greek professional politician will tell you he can solve this problem. A wise risk manager will tell you to get out of the way.
If President Obama, Ben Bernanke, and Timmy Geithner don’t start getting serious about America’s leverage ratios, this country is heading down a European style road to perdition. Avoiding Leverage should be the leadership message in this country, not daring us to take on more of it.
The good news is that Western professional politicians don’t have to take my word for it. On the East side of this interconnected global economy, the Chinese, Indians, and Australians are leading by example. They continue to tighten the screws on lending. They continue to teach their citizenry to respect the cost of capital. They continue to remind their people that borrowing short to finance long term debt liabilities is bad.
Consider the explicit warning coming out of our favorite central banker in the world, Glenn Stevens, this morning. At a business meeting of the minds in Sydney, the Chief of the Reserve Bank of Australia delivered the following messages:
- “However well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks – such as a fall in income – to a greater extent than would be prudent.”
- “Australia’s budgetary position is very different from those in Europe and, for that matter, most countries”
- “Public debt is low and budget deficits are under control and already scheduled to decline.”
Notwithstanding that Australia’s housing sector continues to see huge price increases year-over-year, Australians continue to listen to their leadership. Home loan approvals have dropped -25% in the most recent 6 months, diverging big time from the nominal cost of those homes. Why? The cost to finance a home has gone straight up because Stevens raised rates 6 times during what was the world’s cyclical V-shaped recovery!
This is the critical lesson that Stevens is teaching his people – RESPECT THE COST OF CAPITAL – and whatever hard earned capital you sink into these fertile Australian grounds won’t be burned at the stake of some Fiat Fool currency policy.
I don’t know what sadistic calculations the US government is using for my children for either 2011 deficit/GDP or debt/GDP, but however clever these professional politicians pretend to be, I don’t get paid to buy their storytelling. Much like the Japanese, we are being trained to not respect the cost of capital in this country and, as a result, capital will avoid coming to us in the end.
Just to prove that I am not living in the land of nod on this, here are the results of what Americans think:
USA Today/Gallup Poll on top “Perceived Threats to US Future Well Being”
- Terrorism = 40%
- Federal US Debt = 40%
- Healthcare Costs = 37%
Bingo. When it comes to slapping Wall Street’s hands, Americans have been there, done that. They don’t care about professional politicians going for that win as much as they care about the physical and financial safety of their families. Duh.
Finishing in 4th place was Unemployment at 33%, so what’s the calculus to understand here? The clever politicians attempt to solve #3 (Healthcare) and #4 (Unemployment) by levering up #2 (Federal Debt). Nice.
God help us all if another exogenous event like #1 (Terrorism) comes to these American shores, because we have put our country’s balance sheet in an extremely precarious position whereby we can’t finance war without blowing out our deficit well beyond the ratios of Spain or Greece. What we’ve been wise enough to avoid can quickly become a problem.
My immediate term support and resistance lines for the SP500 are now 1041 and 1078, respectively. The stock market is finally getting Bearish Enough on this political mess. It should be. Hopefully we’ll find some change in this country via this market vote.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer