The U.S. economy has ended a lengthy period of prosperity in which we saw an accumulation of petroleum dollars, synchronized world growth and an unprecedented loosening of monetary policy around the world, which, in part, sparked a simultaneous rise in almost every asset class (stocks, bonds, commodities and residential and nonresidential properties).
This period of surplus cash creation led to a shortage in common sense in borrowing and lending.
My investment concerns, expressed daily to all of you, largely remain unchanged, and as evidence builds daily, my confidence in this outcome increases.
At the epicenter of my concerns are the numerous financial institutions that packaged, sold, held and insured derivative products during the ebullient period of credit and debt growth in the 2000s. Investors continue to underestimate the key role of credit in generating domestic growth -- and how the reduced availability of credit will take away from growth going forward.
The situation looks increasingly dire when weighed against a maturing economy, with fresh signs of housing weakness and an increasingly levered consumer. Household mortgage debt has risen by over $10 trillion since 1999, and with incomes lagging, mortgage debt as a percentage of disposable income has risen from 64% to 100%. (Add in consumer installment and credit card debt and the ratio goes to 131%.)
To put the last eight years' increase of mortgage debt into perspective, the recent rise is more than the increase over the prior 45 years leading up to 1999.
With incomes lagging and home prices on the descent, the health of the U.S. consumer now lies squarely on the shoulders of the equity market. As recent market action indicates, that's a slippery slope of support.
Doug Kass
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