I have posted before about my man crush on Kyle Bass, the hedge fund manager who made a mint betting against housing. Kyle’s 30,000 foot view of the economic landscape, which included the housing debacle, is prescient. I have argued for years we are in a debt deflationary environment and will continue to be there. Kyle does a fantastic job of exposing the truth behind the numbers. I have to warn you though. You will need a change of shorts after watching this, but I believe the truth is always better than comfort. Here are the some of the highlights to give you an idea of why we are in this mess and why the exit won’t be pretty:
1. Over the past ten years, worldwide debt went from $80 Trillion to $200 Trillion – a 11% annual compound rate. At the same time, population growth has been 1.1% annualized and economic growth as measured by GDP at 3.8%.
2. Europe still has its banking crisis ahead. Its banks are levered 3 1/2 times that of the US banking sector and Europe has yet to recapitalize their banks. Our banks are still a mess, but the US has pumped about $800 billion into the bank balance sheets.
3. Germany isn’t the safe haven everyone thinks. Its banking sector is 340% of its GDP so any blip will bring its economy down with it. Germany, like Europe, hasn’t recapitalized its banks.
4. If Japan’s interest rates rise 2 or 3%, they are toast. The interest costs on its government debt would be more than tax revenues. Even worse, the new Prime Minister is claiming he will create 3% inflation. Higher rates come with higher inflation.
5. In the 1970s and early 1980s, the US paid 17% of its tax revenues on interest. This is when interest rates were double digits. Today, we allocate 11% of our tax revenue to interest payments. This is with near zero percent interest rates on short term Treasury bonds. If we have an increase in rates, we will not be able to pay the interest on the debt. Bernanke must keep rates at 0% forever, especially since 50% of our debt is two years in duration.
I couldn’t put the movie directly on the site so here is the link to his speech: http://www.youtube.com/watch?v=JUc8-GUC1hY&feature=youtu.be
Kirk Kinder, CFP® is the Founder of Picket Fence Financial, a fee-only financial planning and investment management company dedicated to saving folks from Wall Street. Picket Fence Financial does this through a few different ways. One, our fee-only approach ensures our advice is tailored to our clients needs and not driven by commissions. Two, we minimize costs for clients by utilizing low cost Exchange Traded Funds (ETF) and aligning our internal operations to keep our company costs down (and passing this along to our clients). Third, we offer a la carte planning, which means our clients decide how they want to work with us. Rather than forcing clients into our model of planning, we offer hourly, retainer, or asset management options (or a combination thereof).
All information on this site are the opinions of Kirk Kinder, CFP® and should not be construed as investment, tax, estate or insurance advice. Please consult your own specialist for personal assistance.