Monthly Archives: April 2012

At Pinnacle Trust, we’ve been talking about the debt problem way before talking about the debt problem was cool.  Since the early 80s, when the last great secular bull market began for stocks, we have piled up a lot of debt.  This chart shows our Total Credit Market Debt as a % of GDP.

As I’ve often said, the biggest problem with debt is that it is a drag to growth.  Borrowing often represents consumption today at the expense of future growth (debt service).  When you have to spend a big part of your paycheck to service debt, there is less to spend on things that cause the economy to grow.  It’s no different for businesses or governments – debt service drains our ability to invest elsewhere.  The red line on the chart indicates when debt has been especially high, defined here as when our debt to GDP ratio has been above 270%. During those times, the economy has grown at an average rate of only 3.9% per year. Compare to when debt has been below 160% of GDP (green line) and the economy has grown at an average rate of 7.6% per year. When debt loads get well above the norm, growth rates fall well below average.  Our biggest new concern is the massive increase in government debt.  We’ll look at private, business and government debt in upcoming posts. 

In order for a new secular bull market to begin, the debt structure has to be deflated.  For now, we remain mildly bullish, but momentum is waning.  – Stacey Wall

In a recent interview, long-time friend Jack Criss, founder of the new website ProBizMS, asked about our track record for usually being on the right side of significant stock moves, both up and down.  It’s something stock market guru Ned Davis refers to as, “Being Right versus Making Money.”  Most investors form their opinions about where the stock market is headed based on their emotional, heart-felt thoughts regarding major issues (the economy, political views, taxes, etc.).  While this may sometimes work over the very long haul, history shows that emotions usually lead to disastrous investment decisions, particularly at major market turns.

While we clearly share (and have often written about) the same concerns as many investors, we remain committed to making investment decisions based on our objective research.  Too much debt in the U.S., a potential European meltdown, high unemployment, fears of a double-dip recession – these are all real woes, yet stock prices have doubled over the last three years in this environment.

Jeremy Nelson, our Chief Investment Officer, was recently talking investment philosophy with a potential client.  “Our three basic rules,” Jeremy explained, “are don’t fight the Fed, don’t fight the tape, and  beware extreme levels of investor sentiment.”  While the stock market advance of the past three years may truly be a Fed-induced liquidity bubble, the consequences of zero-interest rate and easy credit policies have been positive for stocks.  The tape (momentum of the stock market) remains favorable.  And while we’ve had a couple of peaks over the past three years, investor sentiment is currently neutral.

Longtime stock prognosticator Marty Zwieg used to say, “The problem with most people who play the market is that they are not flexible.”  My advice for investors is to ask, am I more interested in “being right” (thus focus on all the problems) or “making money?”

We remain very concerned about how the debt bubble will play out.  Thus, we will not fight the Fed nor the tape should they turn negative.  But for now, the Fed and the tape are bullish. – Stacey Wall