The Myth of Deleveraging

bee

I recently "leveraged" my "free and clear" home with 4%...30 year mortgage which I will repay with fiat currency that become weaker and weaker over the thirty year term of the note. I have decided to put my homes value (depressed as it is) to work by investing in additional real assets (Real Estate, Precious Metals, and defensive equities of businesses such as, Commodities, Utilities and Producers) when they go on sale.

In an article by Doug Noland points out, I am not alone:

- US non-financial credit market debt grew by 5% in the second quarter, its strongest expansion since Q4 2008;
- Corporate credit market borrowing grew by 6.9%;
- Consumer credit grew by 6.2%;
- Federal borrowing grew by 10.9%;
- While household debt has declined by $800 billion since the end of 2007, to $13.5 trillion, federal debt has expanded by more than seven times that decline: total non-financial debt ended Q2 at a record $38.9 trillion, having expanded by $6.5 trillion over 16 quarters;
- As a percentage of GDP, total non-financial debt has grown from 124% of GDP in June 2008 to 249% of GDP as at the end of the second quarter.

Something Gotta give:

"...we go broke slowly, and then all at once."

the-greatest-trick

and,

Prudent Bear

scott

I think that's a bold move and one that will ultimately be right, although may be bumpy in the short-to-mid term.

The local coin store owner (think Old Man from "Pawn Stars") was telling people he did the same thing with the store last year (which has been there for decades), although he said it in more, shall we say, "direct" terms about the currency he'd eventually pay it off in.

hank

Concur with Scott. You've essentially "shorted" the 30-year bond. Who can fault that? We took a new 15-year last summer at bit over 3% (+ minimal points - don't recall). Invested proceeds. No regrets. Turns conventional wisdom upside down. But, blame "bond mania" (and Fed) for driving rates on high quality paper to unsustainable lows.

Old_Joe

If we were in our 50's rather than 70's I would do same thing. Good move, I think, especially since the real cost should be less than 4% considering federal income tax. Highly likely that there will be fairly steep inflation for the next 5-10 years, as that is just about the only way that this debt binge is going to be dealt with.

Speaking of that, I've inadvertently discovered an interesting way to monitor inflation. On Amazon, you can make a list of things that you might want to buy some time in the future. They keep that list right there on your "checkout cart" page, and constantly note the updated prices as they change. Interesting to watch that.

A piece of electronics went from low $50's to $59 in one jump the other day.

Anna

Reply to @Old_Joe: I don't know if Amazon works like a dime store but my husband said that years ago when he had a Christmas gig in a dime store they would have to mark up the items going on sale so that the "sale" price was no different from the price before the mark-up.

Of course you could do a running average of a basket of goods.

scott

Reply to @Old_Joe: The day-to-day certainly may be an indicator, but Amazon in general has far, far less in the way of deals than it did five years ago.

hank

Reply to @scott: Tell that to Radio Shack (selling for around $2.50 - down 80% in past year). OK - you're probably correct on big ticket items like TVs. Where they're eating RS's lunch is on the cables, connectors, switch-boxes and other gizmos we used to buy there. Need 50 ft of audio cable? Pay RS $35 - or find it at Amazon for $12-$15. Gotta be killing RS.

Case in point - link to audio cable @ Amazon
http://www.amazon.com/Cables-Go-17921-Value-Audio/dp/B0000APTOQ/ref=sr_1_5?s=electronics&ie=UTF8&qid=1348771887&sr=1-5&keywords=75'+audio+cable

scott

Reply to @hank: I think you have an environment where Amazon can have less deals than before (and less competition in general I think will lead to less deals, and that's where I see things headed), but you still have the tax benefit and now you have Best Buys acting as Amazon showrooms. I scoffed at the whole "Best Buy" as showroom concept until starting to use my new phone for price comparison tools and I "got it".

Meanwhile, while Amazon's profit margins are stunningly slim, the company is getting bigger and bigger, building out more and more infrastructure and diversifying into more areas. More and more areas are also having the option of "same day delivery" for not that much.

Speaking of inflation though, I'm continuing to notice it continue higher bit-by-bit at the grocery store.

This winds back into the discussion that went on a week or two ago - here:
http://www.mutualfundobserver.com/discuss/index.php?p=/discussion/4067/way-ot-please-explain-jobs-driven-recession-related/p1

Old_Joe

Reply to @hank: You be right again. There's a RS 1/2 block away, but I only go there for things that Amazon doesn't have, or that would incur a shipping charge. The shipping charge is, in fact, the reason that I have stuff listed for possible future purchase... I keep a list of stuff that we can reorder to bring the tab up to the $25 for free shipping.

hank

Reply to @scott: Your points are well taken. Re: their tax advantage: Being from a sales tax state (MIch) I think the current setup is awfully unfair. Our schools, roads etc. could sure use the money. Read somewhere Amazon's close to caving on that issue - to their credit I think. ...

You have it pegged right though. Once Amazon "corners" a market, there's little to keep them from raising prices. The example I cited may be an exception - as markups are obscene on the type of small items mentioned. And the great expertise of the RS people has been diminished by what can be learned now from the Internet. BTW - saw somewhere that Amazon is close to testing "same-day" delivery in some markets. Won't that be something?

And Oh! - The ripple effects are enormous throughout the economy as you imply. - UPS, FEDX big gainers here.

bee

Reply to @Old_Joe:

Hi OJ & others...thanks for the replies. MIT is doing something similar with this project:

"The Billion Prices Project is an academic initiative that uses prices collected from hundreds of online retailers around the world on a daily basis to conduct economic research."

Select the US Index from this link:
Billion Prices Project

scott

Reply to @hank: Amazon has been offering same day service in many major markets, but it's not by UPS or Fedex, it's by local courier services who make deliveries in random cars.

There is a thread at the Amazon forum with over a thousand replies about one of the particular courier services (there are several that are being used) and it's mostly not real positive.

http://www.amazon.com/forum/amazon carrier feedback/ref=cm_cd_tfp_ef_tft_tp?_encoding=UTF8&cdForum=Fx2KOZSYK6OUZ6Y&cdThread=Tx1S36AZK6I1PPQ

In terms of less competition, I just think things start to become dominated by the Amazons, Wal-Marts, Costcos (although I didnt renew my Costco membership and, quite honestly, I'm not missing it) and Targets.

I do think tiny businesses may be helped somewhat by new payment technology - I was at an art fair and I was surprised that a number of vendors were using the Square payment system. Soon people will be able to pay by credit card at the farmer's market, it looks like.