InvestingAdvicebyGeorge – I can’t remember how many times I have written that the U.S. is the largest debtor nation in the history of the world. Well yesterday I was reading a post from a reader who is an economics professor and he told me that I was correct. We are the largest debtor nation in the history of the world but what I was leaving out of that sentence was that we are the largest economy in the world. He told me that the true test is not how large our debt is, the true test is what is our nation’s debt is in relation to our Gross Domestic Product. He further wrote, citing the “CIA World Factbook” that the ratio of our debt to GDP is 53.9% and that figure puts us in 38th place in the ranking of countries in the world. He offered several examples. The dubious distinction of first place belongs to Japan whose debt to GDP is a staggering 225.8% and most surprising to me in 20th place was Germany whose debt to GDP was 78.8%.
While I read this post I connected the dots. While we have the largest debt we also have far and away the largest economy. This makes it possible for us to service our debt much more easily than Japan and Germany. This makes the S&P downgrade all the more ridiculous when we see that France whose “AAA” rating was maintained by S&P hold the position of # 20 in the world. Those that are betting on the collapse of the US will be very upset when they realize that they are on the wrong side of the facts. I believe it is important to have a full understanding of this so we are not trapped by our own misconceptions.
Well yesterday was quite a ride. Just when Wall Street seemed to have settled down we were hit with a barrage of bad economic reports. Foremost was fresh worries about European banks yesterday that triggered a global sell off. The Dow which was down over 500 points intraday closed down 419 points. The S&P closed at 1140 just 20 points for last week’s lows of 1120 and the NASDAQ closed down 132points.
Stocks were only part of the story as oil fell $5.00 a barrel on fears of a global economic slowdown, the 10 year Treasury hit its lowest yield and the average mortgage rate fell to lowest in at least 40 years.
The selling began on Wednesday evening in Asia, where Japanese exports fell for the fifth straight month and the contagion spread like wild fire into Europe where the bank stocks grappled with continuing concerns about debt problems.
We began the day with a dismal report as more people joined the unemployment line than at any time in the past month. The number of claims for people filing claims for unemployment benefits climbed to 408,000 or 9,000 more than the previous week.
Inflation at the consumer level in July was the highest since March. Sales of previously occupied homes fell in July for the third time in four months- more trouble for the housing market which cannot seem to catch a break. While Manufacturing had been one of the economy’s bright lights since the recession ended in 2009 the manufacturing numbers from the Mid Atlantic states were atrocious.
The fact is that we are dangerously close to a recession and it won’t take much to push us off the cliff.
Worries about European debt hung over the market like a dark cloud. A default by any country would hurt the European banks that hold the government bonds and conversely hurt the American banks that have lent to their European brothers.
Add to all of this that the computerized systems that are programmed to analyze charts execute trades with no human intervention was a scene out of a Kubrick movie. High frequency trading programs make up about half of the trading volume on a normal day. On a day like yesterday it’s more like 70%.
If we want to look for a silver lining in the cloud it was our old reliable friend gold. Indeed the only thing that was green on the board. Gold closed up a staggering $30.00 to close at a new high at $1827.00. The gold ETF (GLD) was up $3.30 to close at $177.72. Even silver which has been range bound as of late closed up $0.37 to close at $40.66. A break above resistance at $41.00 will be a very bullish signal for all the silver bugs.
So, in conclusion, as I have written about since July 1st, this moment was coming. I urged all of my readers to hoard cash for days like today. I had a shopping list and I was able to buy XOM, CAT, FCX and some Procter and Gamble (PG) at very near year low prices. I have a bad feeling that we will see further capitulation tomorrow. So I hope you rested well because I expect that judging by the way the Asian markets opened no one will want to go into the market long over the weekend and that means a further selloff.