I recently listened to an interesting podcast with investor Peter Schiff of Euro-Pacific Capital. He’s the guy that earned the title ‘Dr. Doom’ when he correctly forecast the housing bubble that led to the Great Recession. He wrote a book about it two years before it happened.
Schiff – a self-described libertarian capitalist – did a 3 hour interview with Joe Rogan recently. He raised the specter that our recent, record prosperity (pre-CV19) was a debt-driven bubble (government & personal) that has gotten worse in response to CV19.
His thesis is easily shown in 3 charts. First, government debt is through the roof. It is as high as it has been as a % of GDP (104%) since WWII. Even before the pandemic it was needlessly growing …
Second, the stock market has been overvalued for some time. The Schiller PE Ratio is sitting at a 30 multiple – almost 2x the long term market average (16x). Even if you think the market deserves a higher valuation now than in decades past, its current level is concerning …
Third, household debt-to-income is down from the Great Recession, but still very high (1:1) relative to the 1980s-1990s and before. Consumers have become increasingly comfortable with debt of all kinds: mortgages, cars, credit cars, and student loans.
Those three charts add up to a scary outlook: dollars are worth less, investments are worth less, and consumers are upside down in debt. It’s hard to see the next Bull Economy springing from where we are right now, isn’t it?
Schiff argues that the CV19 response has made things even more perilous. Added ‘stimulus’ required $3T in additional federal debt and we lowered interest rates to near 0%. Yes, people are starting to save more in response to the CV19, but a lot of that is ‘magic money’ printed and handed out by the government. It carries with it the risk of much higher inflation – which may be more expensive than CV19 in the long run.
Schiff contrasts these actions with the nation’s response to WWII, since that is perhaps the historical financial territory we are in. Then, government asked for real sacrifices of the American people, including much higher income taxes and borrowing trillions (today’s dollars) through War Bonds. Despite a decade of Great Depression, Americans responded with unity and turned over their savings to help the country through the war.
I’m not quite ‘Dr. Doom’ myself as I’m not cashing out my stocks for gold or real estate. But, I do worry about what the future holds despite the V-shaped recovery on Wall Street. We have enough cash set aside that I figure we can weather a pretty big storm, but it does seem as if the storm clouds are gathering.
The crazy thing about bubbles is that they are very obvious once they pop. I can’t be the only one worried about the way these indicators look. Do you think we are on a debt bubble right now?
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