Sinking Net Worth, Soaring Debt

November 28, 2012

  • A “lost decade”? How about four lost decades for household net worth?
  • Chart goes vertical as a $100 billion tab comes due next summer
  • A new estimate of the “real” national debt
  • Chris Mayer with four reasons to be optimistic about the U.S. despite the numbers… Byron King and Patrick Cox with equally bullish outlooks for their own specialties
  • Chinese Communists are punked… a nominee for the Fiscal Cliff National Monument… and more!

  Behold a new damage assessment from the credit crisis: The net worth of the median American household plunged 47% from 2007-2010.

So concludes a study by New York University’s Edward Wolff. “The debt of the middle class exploded from 1983 to 2007,” he writes, “already creating a very fragile middle class in the United States… [T]heir position deteriorated even more over the ‘Great Recession.'”

Remarkably, if you throw out housing, the picture is even worse: Median nonhome net worth dived 59% between 2007-2010 and is indeed substantially lower than it was in 1962 — which is as far back as Wolff dared to look.

In Washington, Wolff’s study is prompting a thorough reexamination of policies that larded down the middle class with so much debt over the decades.

Just kidding: The Beltway class is latching on to the part of Wolff’s study that noted median net worth among “the 1%” grew 71% between 1983-2010, measured in 2010 dollars.

“Inequality skyrocketed as a consequence of the Great Recession,” says the questionably named Center for American Progress, “taking resources away from middle class, minority and young families while the wealthy made significant gains.”

The statistic is “almost ready-made for an Occupy Wall Street banner,” notes a story at Salon.

  Like it or not, here’s another statistic of that ilk: Student loan delinquencies skyrocketed during the third quarter, according to new figures from the New York Fed.

As of June 30, less than 9% of loan balances were 90 days or more in arrears. As of Sept. 30, the number was 11%. That’s bad enough. In the context of the last decade, it’s frightening.

“Nearly all student loans — 93% of them last year — are made directly by the government,” The Wall Street Journal points out.

“The real fallout from the student loan crisis will hit in mid-2013, four years after the volume of government-funded student loans surged,” our macro strategist Dan Amoss wrote in August . “Like the infamous option ARMs (adjustable-rate mortgages) during the housing bubble, these loans have precisely timed fuses: Four years after the loans are made, borrowers must start making payments.”

“Within a handful of years,” he amends his forecast now, “U.S. taxpayers will be on the hook for over $100 billion in student loan defaults.”

  Then again, what’s $100 billion in a “real” national debt of $86.8 trillion?

Officially, the national debt stands this morning at $16.3 trillion. But as we’ve long pointed out, that number does not include future liabilities for Social Security and Medicare.

Different people come up with different numbers when it comes to the true national debt: Former comptroller general and I.O.U.S.A. protagonist David Walker reckons it’s $71 trillion. Boston University’s Larry Kotlikoff’s number crunching comes up with a figure three times as big, $222 trillion.

The $86.8 trillion figure comes from former congressmembers Christopher Cox and William Archer, writing in an Op-Ed posted yesterday at Yahoo Finance.

“Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities,” the duo write, “they would see clearly the magnitude of the future borrowing that these liabilities imply.”

Contra Messrs. Cox and Archer, they do: The Treasury Department issues an annual Financial Report of the United States Government — every year during the week between Christmas and New Year’s, to make sure as few people as possible see it… Heh.

But… believe it or not… on this Wednesday, we write not to break you down, but rather to build you up. Despite the gloom above, we bring some surprisingly optimistic outlooks from our editors below, after we check the numbers…

  Major U.S. stock indexes are adding to yesterday’s losses. The S&P sinks further below 1,400 — currently 1,396.

New home sales were a “miss” this morning — down 0.3%, to an annual rate of 368,000.

Precious metals got whacked as soon as Comex trading opened. Gold is down to $1,712, silver $33.44. Crude is drifting down below $86.

100  “There are reasons for optimism,” writes Chris Mayer, kicking off a series of anti-gloom remarks this morning: “big, powerful, long-term reasons to feel good about the prospects for your portfolio, particularly in the U.S.”

In part, it’s a relative thing: The rest of the world doesn’t look so hot. China is done emerging, and many of its wealthiest citizens are looking to move.

Meanwhile, “Brazil has problems. It is looking like the banana republic it was and perhaps always will be. India struggles. The EU is shrinking. Japan has mega problems. These are all big markets. And they are all in trouble. The U.S., compared with this lot, has many attractive attributes.” Among them…

  • The housing market is clearly recovering. It is no longer a drag on the economy. Prices have begun to recover in most cities. Investment has started to come back
  • The banking sector is also recovering. U.S. banks are on the mend. The worst problems are behind them
  • There’s also the shale oil and gas boom. Lower energy prices are good for the economy as a whole. As we’ve covered, this is also an aid to U.S. manufacturing, which leads us to…
  • U.S. manufacturing is starting to come back. There are definitely opportunities to make stuff in the U.S. and invest with a world-class set of American companies. Carlyle Group, for instance has committed $4.4 billion to U.S. plays — two-thirds of it in manufacturing and industry.

“I do believe it is a good time to invest in the U.S.,” Chris concludes, “especially as it relates to those four bullet points above — though you still need to be choosy, in particular about the price you pay.”

That’s a strategy proving profitable for the readers of Chris’ premium advisory Mayer’s Special Situations. Last week, he tipped them off to a company he felt was very likely to buy back shares. Yesterday, it announced just that… and it initiated a quarterly dividend. Readers are already up 4%, with plenty more upside to come.

  “I believe that the energy biz will remain a key part of the U.S. economy,” says Byron King, expanding on point three above, and his own area of expertise.

Byron points to the International Energy Agency’s recent annual forecast: “North American oil exports,” he summarizes, “will accelerate an ongoing massive switch in the direction of international oil trade. That is, by 2035, almost 90% of Middle East oil exports will sail toward Asia, where China and India will account for 60% of future global energy demand growth. In that regard, the Middle East will become somebody else’s problem.

“The global energy arena is changing in fundamental ways, based on new technology that’s evolving, and evolving fast. Even for energy insiders — and I’ve been watching and working with the energy biz for 37 years — it’s hard to stay abreast of developments that occur at breakneck speeds.

“Energy accounts for literally millions of U.S. jobs, and hundreds of billions of dollars of revenue — including gigantic tax flows to localities, states and the federal government. Energy will grow, not shrink. It’s a goose that lays lots of golden eggs.”

  Even if U.S. businesses pull in their horns, it’s good news for the biotech sector, says our Patrick Cox.

He caught a recent Wall Street Journal story: “Half of the nation’s 40 biggest publicly traded corporate spenders,” it said, “have announced plans to curtail capital expenditures this year or next.”

“The relevant question, Patrick suggests, “is how do we profit from reduced investment and the associated slow economic growth? Clearly, the answer is cost-cutting technologies. Now, as budgets shrink, the need to accomplish more with less resource is greater than ever.

“This is doubly true in the area of health care as politicized health care industries veer toward deep trouble.

“Despite the cheerleaders for nationalized health care, nationalized health care programs are creaking. Even the U.K.’s often-cited national health care system is barely holding together, with accelerating complaints from consumer groups. One interesting result of these pressures is the tendency to deregulate. They make drugs over-the-counter that the system cannot provide. In the U.K., for example, statins can be bought off the shelf for the simple reason that the NHS cannot afford to provide them except in severe cases.”

Patrick has a basket of game-changing biotech plays he believes will help companies slash their health insurance costs in the years ahead. One of them is already mulling over a takeover offer.

  So while the mainstream prattles on about the “fiscal cliff,” our editors stay busy sniffing out opportunities to grow your wealth.

If you were to subscribe to each of the premium stock advisories edited by Patrick, Byron and Chris, you’d fork over a substantial sum — $4,485. Every year.

But through midnight tomorrow, you can secure lifetime access to all three of those advisories — plus our six entry-level newsletters — for substantially less. This is what our “loyalty rewards” program is all about. If you’ve seen the announcements but you haven’t been motivated to click, we urge you to give this offer a look. But don’t tarry: The offer comes off the table at midnight tomorrow.

  Turns out there’s a corollary to the old saw “Don’t believe everything you see on the Internet.”

It’s “Even if it’s true, someone might be pulling your leg.”

The official newspaper of China’s Communist Party — the People’s Daily — gushed at the news that North Korean leader Kim Jong Un had been named 2012’s “Sexiest Man Alive.”

Which was absolutely true. The award was bestowed by The Onion. Editors at the People’s Daily — blissfully unaware that The Onion is a source of satire — ran with it. Ran with it big…

“With his devastatingly handsome, round face, his boyish charm, and his strong, sturdy frame, this Pyongyang-bred heartthrob is every woman’s dream come true,” said The Onion — and quoted with a straight face in China.

The People’s Daily accompanied its coverage with a 55-image gallery. This was the first in the series…

“I’m on a horse”: Kim Jong Un channels the Old Spice ManThe People’s Daily has since yanked the story… and the photo gallery… from its website. But really… shouldn’t the editors have suspected something was up when the original Onion story mentioned that past winners included the Unabomber?

  We have a fine nominee for the Fiscal Cliff National Monument — our own (strictly satirical) reader-participation project launched in yesterday’s 5.

“There is a Buffalo Jump State Park near Three Forks, Mont.,” a reader advises. How about that — we don’t need to envy Canada’s Head-Smashed-in Buffalo Jump.

Fiscal Cliff nominee, U.S. version…“First Peoples Buffalo Jump State Park, formerly known as Ulm Pishkun, is an archaeological site with possibly the largest bison cliff jump in North America,” according to the Montana state tourism website.

Hmmm… More nominees tomorrow.

  “Don’t forget to use,” writes a reader advising the couple from Monday’s episode who figure they can save $120,000 over the next three years by divorcing. (We’re pretty sure that was satirical as well.)

“At $299, it won’t take too big a bite out of the $120,000 they’re planning on saving through divorce during their final three years of employment.”

  “Tell the couple,” writes another, “to save $120,000 for their kids’ marriages, to get divorced and to tell the kids to cohabit, as that is the trend now, and put the $120,000 into gold and silver, outside the reach of the Elite Ruling Criminal Class in Washington.

“At least one of the kids and maybe more will break up, and if they’re married, they will be spending on an ugly divorce.”

The 5: Cynical, you are…


Dave Gonigam
The 5 Min. Forecast

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