As much as U.S. investors would like to believe in the miraculous, never-say-die, resilience of the U.S. economy, the facts about our “low” unemployment rate and our “accelerating” gross domestic product (GDP) are entirely misleading. Only 46% of 16-54 year olds are working; it was closer to 52% at the eve of the Great Recession in December 2007. Tens of millions of retirees in the early 50s? Not bloody likely. And what about the acceleration of GDP in the last few quarters? It is primarily due to an undesirable increase in household debt.
Here is a brief history lesson. Americans held $6.3 trillion in household debt in June of 2002. Due to the housing bubble in which anyone could borrow any amount to get rich quick, that number swelled to $12.6 trillion by June of 2008. The Great Recession required that consumers had to deleverage, refinance or default, but total household debt only dropped to $11.3 trillion by December 2012. Perhaps ironically, the reamarkble stock gains that occurred in 2013 and 2014 are partially attributable to household debt climbing back up once more, up to $11.7 trillion at the latest figures of September 2014.
Some argue that this proves that U.S. consumers have been happily consuming. Well, yes… on borrowed dollars. After all, real wages have been declining and are actually lower than they were in December of 2007. Isn’t it true that the lower interest rates make the cost of servicing $11.7 trillion in September 2014 much more sustainable than the cost to service debt back in June 2008? Absolutely. Unfortunately, this notion of debt servicing costs being the only important factor means interest rates need to stay permanently lower for U.S. consumers to borrow-n-spend. If rates go higher, the only way that picture does not get ugly is if Americans start earning a whole lot more from their employers.
In other words, either rates have to stay exceptionally low for households and the U.S. government to service the monstrous debts, or households and the U.S. government need to earn a whole lot more than they’ve been earning. Which scenario do you see as most probable – employers paying workers higher real wages in the months and years ahead, or the Federal Reserve barely touching the overnight lending rate?
In 15 years, the Bank of Japan (BOJ) has not been able to get their overnight lending rate above 0.5%. When you combine the reality of low rate addiction/necessity with limited supply/extraordinary demand for longer-term sovereign debt, you conclude that yields will keep falling. Investment possibilities should include: Vanguard Long-Term Bond (BLV), SPDR Nuveen Muni (TFI), Nuveen Muni Opportunity (NIO), Eaton Vance National Muni Opportunity (EOT), as well as Market Vectors Long Muni (MLN) and SPDR S&P High Yield Muni (HYMB).
