News & Insights
The bursting of the real estate debt bubble and ensuing financial crisis marked an exclamatory end to the age of debt and ushered in a more austere and thrifty future for most American households. Since then a combination of near zero interest rates and easy money engineered by the Fed along with big shots of tax cuts and spending courtesy of Uncle Sam has served to cushion the adjustment from boom to bust to recovery. Consumers have responded logically to shed excess debt, increasing the national savings rate from near zero to between 5% and 6%. Household debt still stands at over 100% of household income but is down significantly from over 130% in 2007. If household debt moves towards its long term trend, we will see household debt at between 80% and 90% of household income through a combination of thrift and increased income. This deleveraging process could last several more years.
To offset the collapse in demand resulting from our newfound thrift, Uncle Sam ran the national debt from about 36% to 65% of the country’s gross domestic product. We essentially treated the debt hangover with a little “hair of the dog that bit us.” Many now advocate a more “cold turkey” approach where we emphasize thrift in government expenditures and move toward fiscal balance. Others advocate another dose of government spending and tax cuts to support economic activity. We believe both approaches should be pursued.
Repairing and replacing long-term productive assets such as roads, bridges and tunnels with borrowed money at today’s low treasury rates would support the economy now and enhance our competitiveness in the future. A more conservative Congress is not likely to sign on to an expansion of debt such a move incurs. Trimming future expenditures on Medicare and Medicaid would also help out today by guarding the credit-worthiness of the U.S. Treasury. It is difficult to imagine a left of center administration signing on to a perceived weakening of these treasured Great Society programs.
We believe compromises will eventually be found and the uncertainty characterizing the financial markets of late will abate. At today’s levels we believe stocks are attractive and advise a course of accumulating high-quality shares. Investment grade bonds are overpriced but will likely stay that way for at least a few more quarters. The current environment offers a good tradeoff between risk and long term reward.
The Altavista Investment Team – Fall 2011