Collecting From the Debt Collectors

When I was in venture capital the big joke was that every entrepreneur that came into our offices had a graph that resembled a lopsided smiley face. The horizontal axis was time, usually starting with the current year, and the vertical axis was sales. The line in the graph would usually start off at the bottom left corner of the chart (0 sales in the current year) and end five years later around $1 trillion or some other fantastic number. If any of these companies actually lived up to those expectations, they would have been an unbelievable investment.

That is why the chart below can't be ignored:

Household Sector: Liabilities: Household Credit Market Debt Outstanding (Billions of Dollars)

Source: Federal Reserve Bank of St. Louis

In 1980, Howard Ruff claimed in his book How to Survive the Coming Bad Years that there was no way the U.S. economy could avoid sinking under the huge household debt the U.S. population had accumulated:

Much of the American wealth is an illusion that is being secretly gnawed away, and much of it will be completely wiped out in the near future. ... So what is the rest of your future? A grisly list of unpleasant events -- exploding inflation, price controls, erosion of your savings (eventually to nothing), a collapse of private as well as government pension programs, and eventually an international monetary holocaust that will sweep all paper currencies down the drain and turn the world upside down.

Many people are making the same claim now, particularly with the percentage of debt-service payments to disposable income near an all-time high. This is illustrated in the graphic below:

Influence of Total Consumer Debt on Bankruptcy Filings Trends by Year 1980-2003

Source: American Bankruptcy Institute

Click here for larger image.

However, we can also see in the above chart that during the interest-rate-increasing periods of 1999-2000 and 1994, total consumer bankruptcy filings also dipped.

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At the time of publication, Altucher and/or his fund was long Asta Funding, although positions may change at any time. James Altucher is a managing partner at First Angel Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback and invites you to send it to [e-mail].

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