Tuesday, January 9, 2007

Some Rather Unpleasant Charts
The chart below is self explanatory. Just to update the numbers since 2005, the ratio of total debt to GDP is now near 315% (total debt $42 trillion, GDP $13.3 trillion). Note that this does not include the debt owed to the Social Security Trust Fund (another $4 trillion) - that would take the ratio to 345%.

Source: Gabelli Mathers Fund

The next chart is an index of sub-prime mortgage pool securities rated BBB-, used in pricing credit default swaps and such insurance products for the exotic mortgage market. It is calculated by Markit and the link is:
Sub-prime mortgage originators are facing increasing difficulties in packaging and re-selling their loans; several have already shut down. You really can't make a silk purse out of a sow's ear no matter how much financial engineering you apply - not for long, anyway.

The next chart shows how much money was taken out during the housing bubble in the form of equity withdrawal (to spend on plasma screens, woolly socks and such: the Fed estimates that 2/3 of this money was consumed - not saved). The amount is now going down fast and the impact is being felt in the retail sector.

And last, but certainly not least, American households have been acquiring less and less financial assets (stocks, bonds, mutual funds, bank deposits, etc). While still adding to their portfolios, the amount is going down rapidly. That can't be all that healthy for financial markets as they make new highs - where is the fresh money coming from?


  1. What's interesting about the two debt bubbles that you've identified in your "Total Credit Market Debt" graph is that they're only the most recent ones.

    If you go back through history, there are of course many small or regional recessions. But since the 1600s there have been only five major international financial crises: Tulipomania bubble (1637), South Sea Bubble (1721), French Monarchy bankruptcy (1789), Hamburg Crisis of 1857, and 1929 Wall Street crash.

    Each of these major international crises occured roughly 70-80 years after the previous one. What you find is that each new "debt bubble" occurs at exactly the time that the generation of people who grew up during the previous financial crisis all disappear (retire or die), all at once. Thus, the length of time between these "generational" financial crises is approximately equal to the length of a maximum human lifetime.

    If we think back to ancient history (the 1970s), investment advisors at that time used to distinguish between high-risk/high-return investment plans for young people (the Boomer generation), and low-risk/low-return investment plans for people near retirement (the GI and Silent generations).

    Today, the GI and Silent generations are gone, and the Boomer generation is now -- incredibly -- demanding low-risk/high-return investments. It's this generational change that driving the latest credit bubble.

    Our 70-80 year interval is pretty much over. The next major 1930s style Great Depression is just around the corner, with 100% certainty. Nothing can be done to stop it. All we can do is prepare for it.

    John J. Xenakis

  2. Low risk - high return...I think I'll start a new hedge fund and call it Oxymoron Invstments LLC. Or, better yet, Delusional Returns Inc. The recent rash of hedge and private equity funds seem to go after exactly that target client group that believes this is possible. The first ones in make a killing from setting up and ramping up the whole Ponzi-like game but eventually everyone loses their shirts. Always been thus..

    I agree with you that the passing away of the generation that got "burned" in the previous bubble is very significant as it erases the institutional memory from the population. The new generation is thus allowed to make the same old mistakes in a brand new way.

    I really like the way you set the various bubbles in 70-ish year intervals. Very interesting.


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