Tuesday, June 02, 2009

A nickel on the dollar 
Gas prices seem to be forecasting a recovery - and so long as the Persian Gulf remains as stable as it usually is (HA!), I see seasonally-adjusted increases in energy prices as good news, rather than bad, for the exact same reason I viewed the abrupt decline in gas prices a negative sign last summer, rather than a good sign.

But lookie here: Institutional buyers of consumer debt are not pricing in a recovery. Far from it - they're pricing in a further collapse in the economy!

An executive from a fund that buys "distressed assets" held a luncheon audience spellbound Monday as he talked about what his firm thinks assets such as consumer debt are really worth.

The holders of delinquent credit card debt are valuing the paper at about 14 cents to 15 cents on the dollar on their books, and they are willing to sell the debt for 2 cents to 5 cents on the dollar, Timothy Clark, a senior partner at CarVal Investors, Minneapolis, said at an insurance industry conference organized by Standard & Poor’s, New York.

If the bears are wrong, the bulls will make a mint, buying consumer debt at a nickel on the buck.

Because the U.S. population is aging, Americans need to increase their savings rate to about 8%, from 1.8%, over the next decade simply to fund their retirement. That alone could cut U.S. consumer spending about $800 billion per year, Clark said.

Yes, and it's about the only thing supporting bond prices right now! With the mint printing money like it's going out of style and Congress slopping out spendulus without regard to our children's ability to shoulder this debt burden, and with Geithner's lip-service to "a strong dollar" turning our Treasury Secretary into a laughing stock in China, the only thing left to support bond prices is going to be rapid inflation, coupled with a massive increase in the savings rate.

I fell in to the same trap too, some years ago: I was among those who resented the tendency of libtards to use America's relatively low savings rate compared to Europe's to bash America with. I argued that unlike Europeans, who could fall back on a cushy safety net on the government dime in their golden years, Americans had to be more entrepreneurial with their capital. I argued that Americans were FAR more likely to hold equities in 401(k)s than Europeans, and more likely to own home equity, which could be converted into retirement income later. (I did not consider cash value life insurance at the time, but only because I was a rank noob. I should have.)

I see now that we had substantially underpriced the risk in the equity and real estate markets, of course.

But holy crap... consumer debt at less than a nickel on the dollar!!!! Geez!

Splash, out


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