Downside of Debt

Toddi Gutner

Most market watchers would agree that the air is slowly seeping out of the housing bubble. Appropraitely, now attention is being paid to what the impact is of this sea change. One investment strategist, Jim Shepherd, devoted a good portion of this month’s newsletter The Shepherd Investment Strategist to the role the consumer plays in the economy.

"…this economy’s main engine is the consumer. In fact, one of the chief reasons, I believe, we have not seen the full scale collapse in stocks and the economy yet is because the consumer has been able to borrow in order to maintain spending. This has masked the underlying, serious problems in the economy and given the impression that things were fine. In reality, this nation has been sinking into a pit of debt and much of this has now been placed on the doorstep of the American consumer, literally. Trillions of dollars of debt has been collateralized with houses and has thereby put many at risk of losing their main asset (their home)."

"As I said, with this being an economy now so heavily dependent upon consumer spending, any strain on the consumer is very important to note. We have seen the Debt Service Ratio rise to record levels, which is another way of observing the problems that have been created by accumulating so much debt. Yet, as previously noted, most analysts and commentators choose to ignore all these warnings and just keep chanting the same mantra: ‘buy stocks at all times.’"

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