1. Plunging Tax Revenue
The government wants to bail out the economy. Who’s going to bail out the government? Their revenues are plunging, debts are soaring, and the cost of borrowing money is rising as bond buyers question long-term U.S. financial stability.
We’ve seen a number of economic indicators that are getting worse, but at a slower rate. However, the falloff in federal tax receipts is accelerating. From Matt Trivisonno: Federal withholding taxes fell off of a cliff last quarter, continuing a trend from the three previous quarters:
2. Debt Defaults
We’re in a severe debt deflation. There’s bad debt everywhere – mortgages, commercial real estate, credit cards, you name it. As more and more defaults occur it’s going to get harder and harder for the private sector to finance economic activity. With too many defaults the financial sector will simply collapse under all of the bad debt.
We are approaching losses of approximately $6 trillion — based on a market basket of household debt equal to 100% of Gross Domestic Product (GDP) of $14 trillion (40% of $14 trillion = $5.6 trillion = Round to $6 trillion).
To put that number in perspective, I estimate the total equity held by the financial sector at the onset of the crisis equaled about $1.5 trillion ($15 trillion of assets * 10% = $1.5 trillion of equity). If $6 trillion disappeared in the financial sector, and granting my assumption of $1.5 trillion of initial equity, then the financial sector will go completely broke FOUR times. You only have to go bankrupt once to go bankrupt.
3. An Insanely Overpriced Stock Market
The traditional tool for evaluating a stock’s price relative to its performance is the Price/Earnings ratio. A high P/E ratio means that stocks are very expensive relative to the earnings of the companies. The historical average ratio for the S&P 500 is about 15 to 1. Right now the stock market is priced at P/E ratios so high they make the dotcom bubble of the 90s look sober and cautious by comparison. We’re headed for a big correction in the stock market.
At the end of last month the P/E ratio for the S&P 500 was 134! That is not cheap by any stretch of the imagination. When you put this on a chart it literally flies off the paper:
I don’t see any way we can avoid another leg down in the economy. We have deep structural problems to fix and it will take years to get all of that bad debt out of the system. The one thing you can do now if you haven’t already is to get your money out of the stock market while you can. The current levels are completely unsustainable.