Debt and Deleveraging

January 23, 2012

This is the title of a new report from McKinsey & Company on global debt.  So far, things are playing out pretty much like Ken Rogoff and Carmen Reinhart suggested they would.  To wit:

…major economies have only just begun deleveraging. In only three of the largest mature economies—the United States, Australia, and South Korea—has the ratio of total debt relative to GDP fallen. The private sector leads in debt reduction, and government debt has continued to rise, due to recession. However, history shows that, under the right conditions, private-sector deleveraging leads to renewed economic growth and then public-sector debt reduction.

In many countries, debt is still growing.  In a few, debt has gone down in the private sector (corporations and individuals), mostly offset by rising debt in the government sector.  The good news is that the public sector debt may start to drop when the economy begins to grow.

The Economist has some nice graphics from the McKinsey study.  It’s very interactive and allows you to see what happened around the world over time.  And they make a good point about debt and wealth:

Wealth ebbs away a lot faster than debt. Our interactive guide shows levels of debt as a % of GDP for a selection of rich countries and emerging markets. With a few exceptions, such as Germany and Japan, most rich countries saw a huge rise in debt levels in the years running up to the crisis. Unwinding these dues will take a lot longer. In many rich countries the process of debt reduction hasn’t even started.

I added the bold.  It will take some spending restraint and renewed economic growth to start to pare the debt burdens.  By the way, this is true on an individual level as well as a national level!  When asset values implode, the debt remains.

It’s too early to tell if the US market has turned the corner and will pay more attention to growth than debt going forward.  There are still a lot of things up in the air in Europe and in domestic politics.  Once again, relative strength may be the best option for sorting out what assets are going to perform over time.

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Hotel Occupancy

January 23, 2012

Recessions are usually death to hotels.  Hotel occupancy falls, which often results in an orgy of price-cutting to fill the rooms.  Prices can’t rise until occupancy picks up again.  Since most travel is for business or vacation, it is really, really discretionary.  Cutting out the family vacation or skipping that conference in Cleveland is often the first thing to go when budgets get tight.  As a result, hotel occupancy is a very sensitive indicator of economic health–and there’s finally some good news on that front.

Calculated Risk points out that 2009 was the worst year for hotel occupancy since the Great Depression.  But it has sinced picked up and is now back to its median level from the 2000-2007 good old days.  As usual, Calculated Risk has a gorgeous graphic:

Source: Calculated Risk (click on image to expand)

Good economic news is no longer a rarity.  Consumer sentiment seems to be slowly improving.  Perhaps animal spirits in the market will not be too far behind.

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Weekly RS Recap

January 23, 2012

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (1/16/12 – 1/20/12) is as follows:

The laggards had another strong week last week.

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