Reality Check

So, it’s happened. Unprecedented in our lifetimes is the financial crisis that’s upon us. It is amazing to me that so many were caught off guard. As a steward of my client’s money, I must admit that I too have been amazed at the depth and breadth of this global event. And, it continues to spread like cancer to all corners of the globe.

For the past several years, much of the investing advice has been to allocate a larger, and larger, portion of our portfolios to other regions of the globe. The prevailing ideology has been that the overseas markets aren’t as closely linked to the US as in years past. That is, that they are capable of sustaining themselves. As it turns out though, much of the overseas growth can be attributed to the ever increasing consumption by the American Consumer. Now I’m not an economist or statistician but consider this, over the past decade thousands of jobs have been shipped over seas. The recipients of these jobs are spending their incomes on goods in their own respective countries. This increased demand for goods has in turn created additional jobs in these regions. I know this example is simplistic, but it appears to me that much of the economic growth in the developing world has been fueled by America’s hunger for cheaper goods and services. As the US has fallen into a recession, growth around the world has ground to a halt.

I was reading an article today that discussed China and how it’s been buying our Government bonds with its new found wealth. Understand folks, that when an entity sells bonds (in this case, the US Government), it is essentially borrowing money, money that must eventually be paid back. Now where do you suppose our Government gets its money? Yep, that’s right, by printing more money, and taxation. Guess who pays those taxes. Uh huh, you and me! Now I’m not going to say that China is currently doing that well, but they are now sitting on billions of dollars compliments of the American consumer. How’s that for a transfer of wealth?

Now we have a new problem. The average American Consumer is tapped out. We simply cannot sustain the standard of consumption to which we’ve grown accustomed. This can be evidenced by the unprecedented amounts of debt, and the negative savings rate of Americans. As you know, I wasn’t a fan of the Government’s $700,000,000,000 bailout. The reality is that the credit party is over. The Government has simply paid the band to play on for another hour, or so. It may keep the guests (American Consumer) happy for a little while longer. But eventually it’ll sink in, if it hasn’t already.