Stock markets ended higher today, Thursday, May 31, 2007
by Alan Hall
The U.S. economy has shifted from production to finance as its primary source of wealth. This same phenomenon occurred at the end of Spanish (1530-1588), Dutch (1600-1702), and British (1815-1914) global economic dominance. Some would argue ancient Rome followed a similar path. If you seek a historically proven international symptom of a peak in long-term social mood, this is a good one.
The financial party presaged by Japan and set really rolling by the U.S. has definitely gone global. Because the size and duration of this celebration has surprised us, many would toss history's lessons out the window. But the U.S. is showing other symptoms, one of which is historic debt.
An article in yesterday's USA Today says, "Taxpayers are now on the hook for a record $59.1 trillion in liabilities, a 2.3% increase from 2006. That amount is equal to $516,348 for every U.S. household. By comparison, U.S. households owe an average of $112,043 for mortgages, car loans, credit cards and all other debt combined."
Surely they can't mean WE have to pay this off? How could this be happening in a bull market?
Some will argue that it's not happening. They'll refer to the better looking of the two sets of accounts the government keeps.
The government doesn't want to report accounting that includes unfunded promises to deteriorating Social Security, Medicare and civil and military retirement programs, because it says those debts can be cancelled. What does this attitude say to our citizens and our international creditors? What does it say about our attitude toward debt?
This chart and commentary from the May 2007 Elliott Wave Theorist shows what hedge funds think about debt. They leverage it.
"Bridgewater estimates that the average hedge fund in January had 250 percent of its deposits invested. This month the WSJ reports funds with ratios as high as 13 times. How can hedge funds invest way more money than they have? They borrow the rest from banks and investment firms, using their investment holdings as collateral. So they are heavily leveraged. And this is only part of the picture. Much of the money invested in hedge funds in the first place is borrowed. Some investors take out mortgages to get money to put into hedge funds. Some investment firms borrow heavily from banks and brokers to invest in hedge funds. As for lenders, the WSJ reports today, “…the nation’s four largest securities firms financed $3.3 trillion of assets with $129.4 billion of shareholders’ equity, a leverage ratio of 25.5 to 1.” (May 2007 Elliott Wave Theorist)
An opinion article in today's International Herald Tribune called "Bearish Politics, Bullish Market," says, " The world today looks very different according to which measure - political discourse or global markets - you use to gauge the mood. The vile and the incendiary are enjoying a political comeback, suggesting a planet on the brink. But soaring markets see a benign environment."
That's a valid observation, except that today's soaring markets primarily see… soaring markets. Whatever they see in the "environment" is a secondary consideration -- totally dependent on soaring markets. The article concludes with good insight: "Growth makes the bellicose innocuous enough. But when hard times and harsh political slogans coincide, watch out."
***********************************