Monday, May 29, 2017

USA and global debt

This NYTIMES article is a must read. Two quotes say it all: "Americans have now borrowed more money than they had at the height of the credit bubble in 2008, just as the global financial system began to collapse."

"The fear is that ballooning debt from student loans — and from auto loans and credit cards — could put many Americans back into a hole, prompting a new wave of defaults, much like the one that accompanied the mortgage meltdown a decade ago."

One factor is that new car sales are declining and the auto manufacturers have been using discounts and other profit shrinking methods to keep the cash register ringing. This is largely based on April 2017 and may be temporary. If the declining new car sales trend continues it will become a bit of a drag on the overall economy.

USA Today asserts that the average USA consumer owes $5k in credit card debt. "According to Experian's latest State of Credit report, the average U.S. consumer holds about two bank-issued credit cards and carries a total balance of $5,551. That's a lot of money, especially if you're paying interest of 15% to 20%."

Student loan debt is also of note, studentloanhero reports, "Americans owe over $1.4 trillion in student loan debt, spread out among about 44 million borrowers. That’s about $620 billion more than the total U.S. credit card debt. In fact, the average Class of 2016 graduate has $37,172 in student loan debt, up six percent from last year." That would not be such a serious problem if students that graduate with debt could find high paying jobs to pay back the loans. However, as NPR reports, "Every day, 3,000 people default on their federal student loans — and those lack of payments amount to an unpaid bill of $137 billion for the federal government. For decades, the government has tried to get borrowers to pay up by hiring debt collection agencies to call and send letters. But now the government is trying this new lawsuit strategy." The government debt collection agency plan is not working, we pay far more to the collectors than we collect. We can ill afford that because the government debt is also growing to a troublesome level.

This is not a USA only problem. Last year, global debt reached an all time high. And there are impacts, last week Moody's downgraded China to Aa3 even though their debt to GDP is fairly healthy. In fact, the canary in the coal mine remains Japan, the world's 3rd largest economy. However,  despite all the debt, the IMF report tends to balance this out expecting higher growth in 2017/2018.

As investors, what do we do? Are the cards in place for another pull back in the stock market. Warren Buffet has moved to a high cash position look to capitalize on a major dip with a focus on buying a large, well run company.

  • Wal-Mart is still on my list though I would be looking for a dip. They have largely licked the same store sales problem and are making some traction in online sales.  They are high right now, up 10% for a YoY period, but in a dip it might be a good move.  This would be in the steady Eddie category, not a big score. They might get some benefit from the collapse of Sears, Macy's and other troubled big box stores, if they can find the right smaller store format, (if not keep an eye on Target).
  • I have been thinking about the Internet of Things movement. Even if we head back into a recession, smart this and smart that will keep happening. Motley Fool suggests Verizon, Amazon and Cisco are poised for success. I honestly do not see how Verizon is poised for a lot of growth, I already own Amazon, and Cisco, while up 9% for the year is less than the S&P 500 for the year. I thought a lot about an ETF, (your choice is SNSR or SNSR), but this article points out that is essentially an investment in technology.
  • If you believe that a result of all this debt is a shortage of cash, (or usable cash), then perhaps a barter site is worth considering. One driver will be millenials that cannot afford to buy a house and use Craigslist etc to find a room or apartment to rent. NOTE: many barter sites have some sort of reputation score. If you believe this is an important avenue to explore you may want to start sooner than later. A similar approach is reverse supply chain, I think LQDT might be best positioned here.
  • One way to minimize debt is to encourage inflation. If you borrow $250k fixed rate for 30 years in a home mortgage and significant inflation occurs, you pay off that loan with "cheaper dollars". Other than the debt, one of the biggest inflation drivers is the unemployment rate. It is now historically low
The bottom line. The increasing debt is a driver that will affect the economy, both USA and global. This is not a crisis, I would not expect the sky to start falling tomorrow. However, the level of debt is a force on the global economy and is something the wise investor should watch and consider. In the mean time, to the extent possible, Polonius was right, "Neither a borrower nor a lender be; / For loan oft loses both itself and friend.”"

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