U.S. Dollar: “Reserve” to “Laughing Stock” Currency in Less Than One Century

As we march towards another debt ceiling limit…

The U.S. Treasury Secretary, Jacob J. Lew, wrote a letter to Congress this week stating the U.S. government will hit the debt ceiling by October. He wrote, “…Congress should act as soon as possible to protect America’s good credit by extending normal borrowing authority well before any risk of default becomes imminent.” (Source: U.S. Department of the Treasury, August 26, 2013.)

Lew added, “Protecting the full faith and credit of the United States is the responsibility of Congress because only Congress can extend the nation’s borrowing authority. Failure to meet that responsibility would cause irreparable harm to the American economy.” (Source: Ibid.)

Will Congress raise the debt ceiling again? It certainly will!

Since 1960, Congress has raised the debt ceiling 78 times—49 times under Republican presidents and 29 times under Democratic presidents. (Source: U.S. Department of the Treasury web site, last accessed August 27, 2013.)

The debt ceiling, which is set by Congress, puts a restriction on how much the national debt can be increased.

On August 23, 2012, the U.S. national debt stood at $15.97 trillion. Fast-forward one year to August 23, 2013, and our national debt hit $16.73 trillion. (Source: Treasury Direct web site, last accessed August 27, 2013.) This is an increase in the national debt of 4.75% in just one year. Of course, in all 78 times Congress raised the debt ceiling, the new debt ceiling limit was later hit and needed to be raised again.

Our government continues to post an annual budget deficit. For the four fiscal years from 2009 to 2012, the federal government posted a deficit of more than $1.0 trillion annually. This year, it may be less—but not by much.

The letter to Congress by the U.S. Treasury Secretary is a simple request to increase the credit limit on America’s credit card—just as a family that spends more than it earns might do.

One might think this cannot go on forever—the debt ceiling being raised and the government subsequently hitting that new limit. But when we look at the fact that our debt-to-gross domestic product (GDP) ratio is only 105% and Japan’s debt-to-GDP is 205%, our national debt would have to double to $32.0 trillion for us to match Japan’s debt-to-GDP. But, of course, at that level of debt, instead of the U.S. dollar being the reserve currency of the world, it would likely become the “laughing stock” currency of the world.

Michael’s Personal Notes:

So far, 487 companies in the S&P 500 have reported their second-quarter earnings. Turns out 72% of them were able to beat mean estimates. The blended corporate earnings growth rate for S&P 500 companies in the second quarter was 2.1%. (Source: “Earnings Insight,” FactSet, August 23, 2013.)

On the surface, the corporate earnings growth rate of these companies certainly looks good. But the devil resides in the details!

While a significant number of the S&P 500 companies were able to beat the already-lowered earnings estimates in the second quarter, only 53% of these companies reported revenues above mean estimates. Not impressive.

The financial sector of the S&P 500 reported earnings growth of 28.1% in the second quarter—this was, hands down, the biggest contributor to “robust” growth in corporate earnings we saw in the second quarter.

The other nine sectors of the index didn’t do as well. Sectors like the consumer discretionary, utilities, consumer staples, health care, and industrial sectors showed corporate earnings growth of less than five percent. The telecom services, information technology, energy, and material sectors had negative earnings growth.

In other words: take the financial sector out from the S&P 500 and corporate earnings for the second quarter border negative growth.

Going forward, it’s a rough road. For the third quarter, 103 S&P 500 companies have provided an earnings outlook. Of these companies, 85 of them have issued a negative outlook, while only 18 have provided positive guidance. The number of S&P 500 companies that are pessimistic about their corporate earnings in the current quarter makes up more than 82% of those that have issued their earnings guidance!

All of this shouldn’t come as a surprise to readers of Profit Confidential; in these pages, I have been talking about slowing corporate earnings and revenues since the beginning of this year. For the second quarter, companies in the S&P 500 only beat already-lowered expectations!

Now that we are hearing that the Federal Reserve may pull back on all that paper money printing it’s been busy with, the stock market is going down. The chart below clearly shows the index is falling apart. Don’t expect corporate earnings to save it!

Chart courtesy of www.StockCharts.com

What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for America.” Michael Lombardi in Profit Confidential, November 29, 2007. The Dow Jones Industrial Average peaked at 14,279 in October 2007. A “suckers” rally developed in November 2007, which Michael quickly classified as a bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.

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