Putting the debt ceiling in perspective

Today, the US government hit the ceiling of the "official" or on "the books" debt.

This milestone, I believe, is quite immaterial. First and foremost, this is the on balance sheet debt that people are talking about. The US government has lot more liabilities than this $14.3 trillion represents.

If the government did their accounting as US corporations, using US General Accepted Accounting Principles (US GAAP), the unfunded liabilities would be greater than $100 trillion.

In other words, the US government would have to have today, saved away more than $100 trillion in order to fulfill its financial obligations to creditors, current and future social security retirees, medicare and medicaid recipient, among others.

We can clearly say that the government is bankrupt. But what will the government do? What other governments have done throughout history, that is, debase their currency to pay off their creditors, whether foreign (central banks mostly) or domestic (every worker and retiree in the US).

Outright default is never politically correct, but kicking the can and devaluing the currency is. At the end, when the effects of money printing are felt, governments can always blame goods producers for "creating inflation by raising prices". As the old saying by Ortega & Gasset "When the price of bread rises, the first thing people do is burn down the bakery"

David Walker, the former Comptroller of the US government (The nation's top accountant) clearly explains the unmanageable fiscal outlook. Take a look at this video from 2007:

The fallacy of the “Efficient Market Hypothesis”

The fallacy of the “Efficient Market Hypothesis”

The efficient market hypothesis (EMH) basically says that markets are objective and fully reflect all available information. In other words, whatever a share price is selling for, is a good value and moreover, investors are not going to be able to outperform the market by timing their purchase. This theory also negates the existence of asset cycles and investors do not have to mind when to buy or to sell since “most” investors will get the average market return. The EMH cannot simply explain how you can have “outliers” like Jim Rogers, Jim Puplava, Marc Faber and Peter Schiff.

A good example of why the theory of Efficient Market Hypothesis doesn’t work is Cisco stock.

Back in March 2000, when the Dow Jones stock bubble was deflation, Cisco’s stock was the most valuable company in the planet. It had a market capitalization greater than $550 billion dollars. Its share price was close to $80 and the new economy was going to overtake the “old economy” As we have mentioned before, because of market interference by the Federal Reserve through money and credit creation, asset markets have become increasingly volatile.  

Back then they had revenues of $18.9 billion and net income of $2.7billion and operating cash flow of $6.1 billion, today, they have revenues of $40 billion and net income of $7.7 billion and operating cash flow of $10billion. Today their market capitalization is $97 billion and a share price of $18. The market cap has gone down by a factor of 6, yet earnings have gone up by a factor of 2.85.

The point that we are trying to make is that the market was valuing Cisco at that a very high price (203 times earnings in March 2000) versus its current price/earnings ratio of 12.60. And we are just using Cisco as an example since it was “the stock” to own back then, there are numerous companies which has had happened the same. In our opinion, this is still overvalued, but you get the point that we are trying to make. Capital markets in a Fed-induced credit bubble are not by any way “efficient”. As an investor, you should be weary of using traditional investment valuation tools such as financial statement analysis and take into account investment cycles that we have spoken before. A secondary risk of using financial statements is the fact that accounting standards today change so much, and can vary by industry (Subscription accounting, etc…). 

Lastly, what this example tells us is that the “buy and hold” strategy (more akin to “buy and pray strategy” though) doesn’t work. The astute investor should highly consider actively managing their money by factoring in asset cycles. By doing this, investors should come ahead far more than 99% of other people.