The Nastiest Four-Letter Word

The ballooning amount of debt at all levels, plus the public's determination to honker down and borrow less, is a lingering economic killer.
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Wall Street may have gone wild over Uncle Sam's plan to buy $1 trillion of bad bank assets to help energize the economy, but some investment pros argue that the ballooning amount of debt at all levels -- especially in the consumer sector -- plus the public's determination to honker down and borrow less -- remains a lingering economic killer.

If that's true -- and it seems to make sense -- the end result of the debt debacle appears inevitable: job firings, consumer spending and home foreclosures will continue to mount, while stocks, though off nearly 50% from their October 2007 highs, should once again go down for the count.

Granted, the whopping stimulus packages -- $3 trillion and counting and the purchase of toxic bank assets -- should help inject big bucks into the economic stream. But serious questions remain whether financially-strapped consumers, under great economic stress, will take that money and hop aboard the spending bandwagon. The latest savings rate -- a jump in January to 5%, the highest level in 14 years -- suggests not, rather that the consumer has become much less of a spendthrift. That's an ominous sign since debt expansion -- not debt contraction -- is what economic growth is all about.

What makes it all so relevant is that the overwhelming amount of debt raises serious questions about the vigor of Washington's rescue packages. It also casts heavy suspicion on Federal Reserve chief Ben Bernanke's recent sunny forecast on 60 Minutes that the recession will probably end later this year and the market rally that followed it. He made a similarly poor prediction in early 2008.

The way Wall Street veteran Thornton Oglove figures it, Bernanke might well heed the words of Abraham Lincoln, who aptly once said, "Tis better to be silent and be thought a fool, than to speak and remove all doubt."

That's essentially his assessment of Bernanke's latest prediction. He also belittles the Fed chairman's forecasting record, noting that Bernanke hasn't made an accurate prediction on an economic turning point in seven years.

Oglove is convinced that the current recession will spill well over into 2010, in large part because of what he calls "the triplets of financial hell." These are an across-the-board credit crisis (a reflection of bulging debt-loads and the refusal of lenders to lend), the crashes in the stock and real estate markets and growing unemployment.

Speaking of unemployment, the latest monthly figure shows a rise to 8.1%. But O'glove figures if you factor in the various categories of unemployment -- namely the actual unemployed, discouraged workers who have given up looking for a job and part-time workers who would like to be employed full time -- the jobless number probably approaches 15%. Given no letup in the economic turmoil, he looks for the ever growing increase in unemployment to have a "horrific effect" on the price of homes and most segments of debt. Heightening the consumer's woes is a $300 billion drop in wages and salaries on an annualized basis.

A former banking and insurance analyst and now a San Francisco investment consultant, Oglove made a name for himself on Wall Street between 1968 and 1990 as a crack investigator of balance sheets and the quality of earnings.

There's no doubt that debt -- more specifically, too much of it -- is probably the nastiest and most worrisome four-letter word right now in the economic vocabulary. The debt numbers are frightening. The average consumer household, for example, is in hock for 140% of its annual income or, in its entirety, for about $14 trillion.

Included here are $700 billion of sub-prime mortgages, $4.7 trillion of prime mortgage debt, a fair amount of which is becoming increasingly suspect because of the recession, $1 trillion of auto loans, and credit card debt of $1.1 trillion, coupled with about $4 trillion of credit lines. Those credit lines, though, are dwindling fast as credit card companies, stung by soaring debt defaults, are slashing the numbers of their potential borrowers. By year end, O'glove calculates, "we should have another credit debacle on our hands."

Adding to the financial impotence of consumers was last year's wealth devastation. According to the Federal Reserve, the average U.S. household, rocked by wicked declines in the value of its stock portfolio and its home, lost about 18% of its net worth, or in total $11.4 trillion.

Government debt also figures into the equation. Currently close to $11 trillion, up from $9.4 trillion a year ago, Oglove figures the number will rise to $20 trillion in four years. That, of course, would be a harbinger of higher taxes.

Noting that the total U.S. stimulus package to date, including government monies lent, spent or pledged, now totals almost $12 trillion. O'glove reckons hyper inflation undoubtedly lies ahead because of the inevitable need to speed up the printing presses even more. By year end, he believes, most economists are likely to be more worried about inflation than deflation. He notes, in fact, that inflation is already presently growing at a rapid rate in such areas as food, medical costs and college tuition.

What does it all mean as far as investors go? "Much lower equity prices, possibly down to Dow 5000," says O'glove, "because the market is now predicting the U.S. is entering a mini-depression."

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