Is This Finally the Economic Collapse?

Professional politicians in Japan have been telling stories for 20 years as to why they can prevent economic stagnation. In the US, the storytelling started in 2007. All the while, stock market and real-estate prices have repeatedly rallied to lower-highs, then collapsed again, to lower-lows.

Despite the many differences between Japan and the US, there is one similarity that continues to matter most in the risk management model my colleagues and I use at Hedgeye, our research firm -- debt as a percentage of GDP. Now that the US can't cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing -- buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It's a point from which it's almost impossible to return.

On July 2nd, we cut both our third quarter 2010 and full year 2011 GDP estimates for the US to 1.7%. At the time, the consensus around US economic growth estimates was about 3%. Now we're starting to see both big brokerage analysts and the Federal Reserve gradually cut their GDP estimates, but not by enough. Even our estimate for 2011 is still too high.

Slowing growth, both domestically and in China, is core to our bearish views on both the strength of the US dollar and US equities. There will be a downward bias to our US growth estimates as long as debt-financed-deficit-spending continues to be the solution politicians and central bankers turn to as a fix to our financial crisis.

Markets trade on expectations. Yesterday's zig-zag in the S&P 500 was unlike most sleepy August trading days in America. That's because the 'government is good' crowd leaked word that this second round of "quantitative easing," known as QE2, was coming, and that Ben Bernanke was going to respond to our buy-and-hope begging. (The first round of quantitative easing was the Fed's unprecedented purchase of agency debt to prop up the housing market, along with credit facilities for big banks, which began in 2008 and ended earlier this year.)

To think that we have institutionalized market expectations to this degree is downright frightening. It seems impossible but true that all rallies start and end with rumors about what Fed Chairman Ben Bernanke, a humble looking man of government, had to say at 2:15 PM EST yesterday afternoon, or any other day he makes a statement.

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Source: CNN Money | Fortune 500