Does the U.S. have a Spending or Revenue Problem? US Debt and Deficit

Does the United States have a Revenue Problem or a Spending Problem?

Since 1960, the United States has been on a Spending Trajectory, and the annual deficit over the last four years has been over $1 Trillion Dollars.

The Current U.S. National Debt is around $16 Trillion, and it is now over 100% of GDP (Gross Domestic Product).

But is it a U.S. Spending Problem or a Revenue Problem?

In the chart above, we see Spending and Revenue as a Percentage of GDP. 

Revenue since 1960 has remained in a narrow range of GDP and averages 18.1% over that time.  In that time, even if tax rates vary significantly, the Revenue has stayed in this narrow range with an 18.1% of GDP average.

Spending, on the other hand, has averaged 20.2% of GDP.  Since the Government can continue to borrow (with the Federal Reserve printing money), and since Government can continue to spend without any solid limit, you can easily forecast spending to continue growing.  When you consider a bulk of those annual payments goes to Social Security, Medicare and Medicaid, and since the U.S. Population is Aging and the Baby Boomers are starting to retire starting in 2011, you can imagine spending to continue to increase as a percentage of GDP.

So with Spending continuing to increase as a percent of GDP, and Revenue remaining a relatively constant 18% of GDP, you can see how the U.S. Debt Problem can grow year after year to create a crisis economic situation possibly leading to long term decade or multi-decade economic stagnation, or recession or depression.

The Problem the United States is having is a Spending Problem and not a Revenue Problem.

The Data:

Charts were created by this site, and Heritage.org, and data from the Congressional Budget Office.
The Spending and Revenue Chart above is based on the CBO's 2012 Long Term Outlook report, using the Externded Alternative Fiscal Scenario, Table 1-2. 

Ten Year Predictions including Global Great Depression, War, and Obama/Romney.

Today is September 24, 2012, and here are some ten year predictions (ending December 2022):

A. United States Elections:

1. President Barrack Obama, Vice President Joe Biden and the Democrats will win the U.S. election of 2012.
2. Following a major stock market crash between 2012 and 2016, the Republicans will win the election of 2016.  However, the defeat of Mitt Romney in 2012, and the bad state of the economy between 2012 and 2016, will temporarily end the reign of the Moderate Republican in the mold of Mitt Romney, Senator John McCain, and President George Bush.  2016 will be the year where the true Conservative or Libertarian Reformer, running as a Conservative,  take over the United States.
3. The election of 2020, as the economy recovers will also be won by the Conservative Reformers elected in 2016 and 2018.

B. U.S. and World Stock Market.

1. Between September 2012 and December 2022, there will be one or more Stock Crashes, possibly even two or three Stock Crashes or long declines.
2. The First Market Crash will be between the years 2012 and December 2015.
3. There will be at least one major tradable cyclical bull market in stocks during the years 2012 and 2022, and the first one might be between the First Crash (between 2012 and 2015) and the Second Crash.
4. By 2020, the U.S. Stock Market as measured by the S&P 500 will be very close to today's level of 1456 or below.
5. Before 2020, we may hit the S&P 500 level of 600-1000.  That's a drop of around 30 to 60% from where we are now.
6. There may be a Global Long Term Secular Bear Market and possible a long term Global Depression rivalling and possibly exceeding the Great Depression lasting till around 2018 to 2022.
7. For those with a twenty or more year long term investing horizon, there will be many great investment opportunities within the next decade as stocks will be on sale and be discounted.

C. U.S. and World Economy

1. U.S. Unemployment is now 8.1% and we will reach unemployment levels of 10 to 14% sometime within the next decade (until 2020-2022).
2. U.S. interest rates might go down a bit more with the Fed's Quantitative Easing 3 (QE3), but the bond bubble will eventually pop, and interest rates will rise causing a lot of problems in the economy.
3. The Debt bubble including U.S. National Debt, State and Local Debt, Consumer Debt, Student Loan Debt, and underwater Mortgage debt bubbles will pop.
4. There will be increasing bankruptcy by individuals, corporations, local government, and even countries.
5. The U.S., State, and local Governments will be paying more interest, at higher rates, on ever increasing debt.
6. The U.S. National Deficit will still be a major problem for many years and the U.S. National Debt problem ($16 trillion and counting) won't be solved easily.
7. Globally aging populations, overspending, and borrowing will doom much of world's economies.
8. The average credit score of U.S. citizens and residents will decrease from September 2012 to 2018 - 2020.
9. The U.S. Standard of Living will remain stagnant or decline from 2012 through 2018 - 2020.

D. Housing:

1. QE3 can keep interest rates and mortgage rates low, but when the Bond Bubble and other Bubbles pop, mortgage rates will rise, making housing less affordable, and putting downward pressure on housing prices.
2. Lending will still be tight, and lower credit scores because of a worsening economy will make it even tighter, reducing demand for housing, and putting downward pressure on housing prices.
3. Another economic downturn and increasing unemployment will hurt housing prices.
4. There will be another round of short sales and foreclosures for the housing double dip.
5. Even if housing prices rise because of tight supply in the short term, the great overhead supply of all those mortgages underwater, will keep a lid on any house price appreciation.
6. U.S. National Home prices will remain stagnant or decline over the next six to eight years till 2020.

E. Education:

1. The Higher Education Bubble of increasing student tuition and student debt will finally pop.  There will be a greater number of student loan defaults.
2. There will be proposals trying to reform Education especially Higher Education.  The proposals will include encouraging private companies and alternative education companies.
3. There will be private companies who may try to make education more efficient, including providing high tech education tools, provide trade school training, and encourage electronic and distance learning.
4. There might be a rise of cost efficient higher education centers which includes schools that focus primarily on education without the investment in sports, electives, and expensive or impressive buildings.
5. Prospective college students will be choosing their major mainly based on the Return on Investment since higher education will still remain expensive despite attempts to reduce costs.  Parents will try to dissuade their college aged children from taking lower return on investment majors such as Art.

F. Investments and Careers:

1. Healthcare companies will continue to do well as baby boomers retire and the population ages.
• Companies such as Gilead (GILD) and Johnson and Johnson (JNJ) could do well.
• Even companies such as HMS Holdings (HMSY) which benefits from Government Healthcare Waste could do well.
• In the attempt to be more efficient, the Digital Healthcare Systems and Digital Healthcare Records field might still do well with companies such as Cerner (CERN), Quality Systems (QSII) and AllScripts (MDRX).
2. Healthcare field and careers will continue to do well, and there may be a boom.
3. Answering the question: "Where will Baby Boomers spend their money?" when they retire might produce good investment results.  Aside from healthcare, consider entertainment companies including Cruise Ship Company, Carnival Corporation (CCL).
4. Gold may continue to be strong as a stable currency as countries debase their currency by continuing to print money, especially the United States.
5. Consumer Staple companies such as Procter and Gamble (PG) and Pepsi (PEP) may continue to do well.  Ask the question: "What will people continue to buy during a major economic downturn?"
6. Select trend changing companies might do well.  Apple (AAPL) was that company for many years.
7. The technology field will continue to do well, as people look to technology to improve efficiencies and productivity to do more with few workers as the population ages.  Technology can include companies like Monsanto (MON) which creates drought resistant crops and more productive crops.
8. There are financial companies which can continue to do well during downturns.  These could include companies such as Pawn Shop and Payday loan companies EZCorp Pawn  (EZPW) and First Cash Financial (FCFS).  There's even Portfolio Recovery Associates (PRAA), a company that attempts to collect defaulted loans, as defaulted debt increases in the scenario above.
9. The education field might continue to be a stable profession, especially with the Echo Boomer Demographic.  However, with fewer babies being born, there might be a limit to the growth in the education field.  This could be helped as the country encourages younger immigrants to immigrate to make up for the fewer American born babies.
10. Stable companies with good cash reserves, and which provides good, steady, or even rising dividends even during market downturns are possible investment contenders.

G. Immigration, Families, and Society

1. During the major downturn, there will be talk in the media discussing demographics and the role of an aging population.
2. Four (2016) to eight (2020) years from now, as this discussion takes place, law makers will propose incentives to have more American born babies.  There will also be proposals to loosen immigration laws to encourage immigrants with special skills, and young workers to emigrate to the United States.
3. Other countries with ageing populations will propose similar policies.
4. China might eventually end their one child policy.
5. Crime will increase.  There may be more violent gangs and thugs and the police can be powerless or not have enough resources to fight back.  There will be programs to make police more efficient and to do more with less.
6. There can also be a rise of vigilantism and people may try to band together to defend their families, their property and their neighborhood.
7. Household formation will still remain low.  There will still be a lot of youth and young adult employment.  Many will still be staying with their parents for many years, and may even continue to live at home when they marry.  This might be good for home improvement companies such as Home Depot (HD) or Lowe's (LOW) which can benefit when families choose to renovate homes, renovate basements and add extensions to support extended family.  Houses will become more multi-generational.
8. There will be many protests in the street and around the country, and some may turn violent and turn into riots.  These protests would be more widespread than the protests and riots of the "Occupy Wall Street" movement.  This would happen more often after the downturn, and as people realize that the current path, and the current expectation of government benefits cannot be sustained and that fiscal tightening is necessary.

H. U.S. Government

1. Fed chief Ben Bernanke may not have the job as the Fed Chief beyond 2014.  If the Republicans win the 2012 election, he will be replaced.  If the Democrats win the 2012 election, and if the bad downturn in the economy occurs before 2014, Ben Bernanke will also be replaced as the Fed Chief.
2. After the Bubbles pop, there may be fiscal tightening, which may affect people's standard of living.  Everyone will have to have lower expectations.  Different fields from the Military, to Entitlement programs, to subsidies, to government guarantees, to bailouts, to FDIC guarantees may all be reduced or cut.
3. With so many more people having lower credit scores, some politicians may try to give amnesty to people with lower credit scores.
4. There will be serious discussion about getting back to the Gold Standard.  Law Makers may even propose it, but it may not be made a law.
5. Between 2016 to 2024, there may be many reforms and laws made to abolish or limit the "Fed", the Federal Reserve.

I. Terrorism, Conflict, and War.

1. There could easily be military conflict or even war involving one of the countries such as Iran and Israel.
2. Since the economy of the U.S. is likely going to go downhill, any conflict will push the United States further downhill.  There will be tough decisions that need to be made whether to spend money and resources to fight the war.  What if Iran decides to attack the U.S. when Israel attacks Iran?
3. Cyber War will be a common form of terrorism, and bands of international cyber terrorists will launch attacks on the United States and other countries.
4. Chinese will have a surplus of bachelor men which could lead to internal violence and crime, or it might encourage China to flex its muscle causing great tension in the region.  Will the United States defend any ally from attacks?  Will the United States just watch as China takes over contested land?  What will the U.S. do?
5. There may be other terrorist and other criminal attacks on the United States and U.S. interests around the world.  Rather than directly attacking the United States mainland, U.S. interests around the world will be attacked, including U.S. citizens.  What will the United States response be?
6. The new leaders of 2016 will create a new Foreign Policy Doctrine to determine the conditions whether the U.S. should be in a war or not, and to help define Appropriate Response to attacks on the United States, United States interests, U.S. allies, and U.S. Citizens around the world. 
7. From 2016 to 2024, internal discussions in the White House will be held in private to determine whether to follow the Bush Doctrine, or to modify it, or create a new foreign policy and national U.S. security doctrine. 
8. The military, before any war begins may have its budget cut.  There will be a push to make the military more efficient and cost effective.

Monster Stock Rally, Blowoff Top then Massive Stock Crash?

In the last post, this blog speculated that we are nearing a Major Market Top and will hit the third peak in a Triple Top, and we may see declines and stagnation for many years.

But what if, instead of a Triple Top Reversal, what if we break out of the previous highs on the S&P 500 (around 1550-1565 on the S&P 500 set in the year 2000 and 2007)?  Then, we will have a very bullish Triple Top Breakout.

We could even be experiencing an Ascending Triangle Formation.  At the end of the Ascending Triangle, stocks could breakout upwards, a bullish sign.

But can this really be sustained?  In previous blog entries, this blog mentioned that there are many headwinds from a National Debt out of control and now at over 100% of GDP, and the Baby Boomer Demographic Retiring. 

This could be part of a major Blowoff Top (like a Volcano) where the mother of all rallies, a massive major rally will be followed up by major stock market crashes and declines.

(The Run-up could be spurred by the Fed continuing to print money (with QE3, and other programs), and short covering rallies as people short near the S&P 500 all time high, and possibly an economy that looks to be improving despite all the headwinds in the market.)

Will we be following Japan's lead (Nikkei 225) if we follow this Blowoff Top Pattern?

Look at the massive runup in stock prices in the Nikkei 225 from 1985 to 1990, and then a multi-decade set of stock market declines and massive crashes.

The U.S. S&P 500 stock index is now (Thursday, September 13, 2012) at 1459.99, is only 7% from the all time high of 1565.

Stock Market Major Triple Top: Big Drop Ahead? Target S&P 600.

The U.S. Stock Market as measured by the S&P 500 index is at 1429 (Monday, September 10, 2012), just 10% below the all time closing high of around 1565 on October 2007.

The S&P 500 is nearing very strong overhead resistance, and it couldn't surpass it in 2000 (top #1) and then again in 2007 (top #2) when it could not surpass the all time high of 1565.

What if S&P 500 Can't Break Resistance: Target: S&P Level of 600, a drop of 58% from here.

There is a very bearish technical pattern called the "Triple Top Reversal" 

The pattern is more than establishing three peaks (and the stock market price not exceeding the last peak).  It also requires the stock pattern to reach the Confirmation Line (currently around S&P 700), which marks the previous valleys in the Triple Top pattern.  Some websites and books say the average decline from a triple top reversal pattern is around 15-20% below the Confirmation Line.

But since the time between Major peaks is more than 6 months (many years in the diagram above), the average drop is less reliable, but the pattern does mark a Major Market top.

It is possible if this scenario takes place, this could mean that the market could suffer many more years of difficulty (with stock market crashes and violent rallies).

The Fundamentals and Demographics support this theory:

All around the world, there is a global debt crisis, with countries planning to default on their debt.  The United States now has $16 Trillion in National Debt, which is more than 100% of GDP (Gross Domestic Product), and currently, there is no sign that the U.S. can control their finances, spending, and revenue.  This number also does not include $62 Trillion in Unfunded Liabilities or Promises to pay (which includes Social Security and Medicare).

The large Baby Boomer demographic is retiring and they will be selling their assets, and also, they will be claiming benefits such as Social Security, Medicaid and Medicare.  The younger generations are supposed to help pick up the slack, but there is not enough to do that, and there is high unemployment among the young adults, and many people are riddled with high debt, underwater mortgages, and ever increasing college tuition.

The Bond rating Agencies, in 2011, for the first time ever, downgraded the U.S. Creditworthiness.

Based on all this (and more), the U.S. Market might be headed towards another lost decade (2000 to 2020)?