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‘Awesome’ chance for investors after US debt debacle
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WHILE GDP growth has occurred, America remains the world’s only discretionary consumer, and without real jobs growth and real income growth post-1975 we have only witnessed a parabolic growth in debt.
While borrowing can relieve short-term growth hangover in the short term, we are hard pressed to overcome the sheer lack of incremental, marginal productivity to (support) such a meteoric rise in debt per capita but more importantly, debt per “working” American.
The economic tipping point long ago achieved, we now are more worried about a post-Fed-centric world where American “relative” productivity declines while the rest of the world charges ahead.
In the words of Jeff Bezos, founder of Amazon.com, “Your profit margin is my business opportunity.”
We see the rest of the world creating headwinds for continued American “all time record” profit margins Ñ leading to an otherworldly decline in margins Ñ just as America’s debt reaches a stunning 110 percent of GDP.
As Larry Kotlikoff and I have opined, America is actually 220 percent debt-to-GDP when measuring the (NPV) net present value of future legally contracted future payables heretofore unfunded. That means they have to come from taxes.
Margins down, net income down, taxes down, claims paying capability also down. And then we examine how pensions are also underfunded nationwide, meaning that not only is the government insolvent, but so are states and related entities.
The only possible result is an increase in taxes, but not until 2019 when the system runs completely dry and incremental stimulus no longer creates positive GDP results, no matter the size.
In this case, negative convexity ensues and America must confiscate assets to remain solvent as a government.
Print the difference
The rule of law in America is strong!
This means that the comptroller of currency, now Janet Yellen, will necessarily have to print the difference.
This is the money created without return, and this is the money likely to be considered most inflationary.
We can wait out the current stock market miracle and wait for 2016-17.
It is entirely likely that we reach a generational buying opportunity before the “great leap forward,” which is a leap created by massively inflationary policy. That remains our greatest prediction and opportunity.
We wish the best for all families, but protect our clients for the truly awesome opportunity forthcoming.
Shawn A. Mesaros is managing director of Pacific Asset Management.
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