From Bad to Worse

I wrote on May 1 why I am a long term ultra bear. I wrote how I believe the stock market will crash in a P3 scenario sometime in the next few years based on the debt load our country has taken on. I laid the case out here:

http://top-traders.blogspot.com/2009/05/thoughts-on-my-long-term-view.html

I felt an update was in order after the CBO's updated forecast of future deficits. Well the news IMO went from horrible to gut wrenching. The numbers they throw around are nearly impossible for any human to imagine. You can try the "lay dollar bills to the moon" type analogies, but face it I have no idea how far the moon is away. Pick 'n Save OK. I can relate to that. I've been there. I have a talent for analogizing things in a way people can understand. So I will try to do the same here.

Mike Hunt makes a decent living and he is very handsome. He brings in $50k per year in a very steady job as head brewmaster at the Town of Delafield Brewhouse. He's had this job for years and for the sake of this analogy let's say he never gets a raise or gets his wages cut. Ole Mike lives within his means. He has two credit cards that he pays off monthly. Only a few times has he had to rack up debt that he could not pay back monthly and carried a balance for only several months. These purchases were for emergencies (new brakes, furnace repair, etc.)

Well for some reason Mr. Hunt decides he wants more things than he can afford. The 32" tube TV just is not the same as that 57" Plasma at Best Buy. So Mike asks his bank for a HELOC. No problem says the bank. He's got excellent credit, no debt besides his mortgage and auto loan and is not any risk at all.

Well that was so easy and only a few grand that Mike decides next year he is gonna take that trip to Cudahy he has always wanted. He'll do it on the cheap. Once again Old Mike heads to the local banker. A few grand, low interest like last time. He'll be sipping Old Style Pulaski Park in his new Packer Zubaz in no time.

For the next few years Mike Hunt gets a little bolder. Nothing too much. $2000-$2500 max. Then he has a mini emergency. Mike needs to remodel his basement. See he is so certain after two stellar preseason games that the Packers will be in the Superbowl. He wants to host a SB party. So Mike Hunt goes to the bank to borrow $30k.

The banker gives him a pause. Then he agrees that since Mike has never missed a payment he'll take the risk. Now old Mike only makes $50k per year and he has a mortgage and car payments like everyone else. This $30k will stretch him pretty thin.

During the basement remodel Mike realizes that he wants to add a porch to his house for another $30k. He just HAS to borrow for a downpayment on a second home in Cudahy since he fell in love with that city, another $15k. Pretty soon Mike has a list of ten projects each requiring $15-25k. This will last for the next 10 years at least.

What will the banker say when Mike tells him of his plan for the next decade? On top of this the banker knows Mike has two teeneage daughters (let's call them Social Security and Medicare) that will be attending college in the next five years. Mike Hunt will need thousands for this. And Mike's house may need cash for emergencies like a new roof or new kegerator.

Then Mike catches word that his hours are being cut by 5 per week and possibly more next year. What will happen to Mike when he can no longer make the monthly payments? When will the banker say "no more"? What will the banker do to Mike when the payments are not made in full each month?

Back to reality. You guys probably followed along with this analogy. The US Treasury collects about $2.5 trillion per year. We've had deficit spending almost every year since the early 80's. Nothing too much. Prior to 2009 the largest deficit was $400 billion. Compared to $2.5 trillion not much.

Then comes 2009 (note this is not an attack on the current president) and our deficit EXPLODES to $1.5 trillion! Yesterday it was announced that 2010 will also be $1.5 trillion in the red. Furthermore deficits in the $1 trillion range are predicted almost EVERY YEAR for the next 10!

It gets worse. Seriously! This is a "rosey" prediction by the CBO. To meet this estimate the economy must rebound by next summer! Like back to the bubble peak rebound. Unemployment back to 5%. Home values back to balloon prices. Second mortgage o'rama revisited! This is impossible given that the consumer is tapped out of credit. The maximum ability to service debt has been reached at already record low interest rate levels. Furthermore a much larger segment of our population will be leaving the workforce and will most likely enjoy a downsized retirement lifestyle lessening the number of those adding to the collective (taxpaying) workforce and further draining the gov through SS and Medicare.

It gets worse. Honestly! Also figured into this rosy scenario is a complete repeal of ALL of GW's tax cuts. $1000 per child tax credit. GONE! $75k depreciation for small business purchases. GONE! Lower tax rates and elimination of 10% tax bracket. GONE! Temporary raising of the limit for the AMT. GONE! IMO there is no way the Dems will not make an attempt to keep these in place. At least for those making less than $200k per year.

It gets worse. John shut up, we've heard enough! Sorry guys. The worst is saved for last. Remember Mike's daughters, Social Security and Medicare? Well guess what, they just got accepted to MIT and the older on is talking about a wedding. According to the CBO the ticking time bomb known as social security that was thought to become insolvent sometime in the 2020's will now be inslolvent as early as 2010! YIKES! See the graph on the first page.

http://www.cbo.gov/ftpdocs/104xx/doc10457/08-07-SocialSecurity_Update.pdf

Most likely sometime between 2010-2018 SS will be in the red. That means we will need to draw on the "reserves" from the last 70 years of SS. Phew! At least we have those reserves. Not so fast! We opened the "lockbox" of reserves buried in the back yard and found only IOU's. Looks like wifey borrowed the money and left IOU's in place of the cash. Guess where the money comes from to pay back the spent SS surplus. That's right, taxpayers.

It may be even worse yet! Huh? What? How? Well remember our good old buddy Ben Bernanke back in March when he announced Quanitative Easing by the Fed? Something like $1.5 trillion dollars to purchase things like bonds and mbs? Well we don't know exactly where that money went or when/if we will get it back. Here is the best I could fine representing what they own.

http://www.zerohedge.com/sites/default/files/images/Fed%20Balance%20Sheet%208.19_2.jpg

Could be yet another boat anchor around our necks.

Boy John you sound pretty gloomy. I sure do. I honestly do not see any way out without extreme pain. Perhaps in another post I will write about what I forsee as possible "solutions", but this has gotten lengthy enough already. Feedback is appreciated.