Taking Stock

It’s not quite the end of the year yet, but for us, it’s close enough. For the financial markets, let’s call 1990 the year of the other side of the coin.

Or was that the other edge of the two-edged sword?

For a financial system overbuilt upon layers of debt and creative financing, 1990 must surely mark the end of an era. And for all the “good” leverage that prevailed from debt on the way up, an equal and opposite reaction began to happen on the way down.

Let’s start with savings and loans. What was to be a few billion dollar problem grew to a ten billion dollar problem — tops. I then recall $86 billion, $100 billion, $200 billion and now half a trillion. When, or rather where, will it all end? Let’s hope soon, because now, it seems, some are saying the same things about commercial banks that were being said about the savings and loans.

The problem it seems is commercial and residential real estate debt, number one, and the inability of those starry-eyed borrowers to repay that debt with or without interest.

It’s an international problem as well with a host of foreign nations owing but unable to repay Uncle Sam the billions and billions owed for food, munitions, etc.

The odds of a payback seem so remote that barely a brow was furrowed when George Bush planned to forgive the $7 billion Egypt owes us. All these dollars are starting to add up especially in lower quality, formerly high yield but now “junk” bonds. The “formerly” part regarding the high yields is because so many are now unable to pay even the interest on the bonds.

The bad part is far too many financial institutions, including insurance companies, own more than their share of such debt and more than enough to compound their real estate troubles.

There’s a great yield out there somewhere if you can get it.

The debt party seemed to envelop America from corner to corner. It was great while it lasted, but at year’s end debt leaves the U.S. — and perhaps the world — in its first recession in eight years and first non-excess inventory one in the post WW II experience.

Normally, a recession is an inventory blowout with some great discounts that ends when the country goes back deeper into hock. Being already in hock with lean inventories makes me wonder how we’ll get out of this one.

I would guess the stock market wonders that too. While the Dow dipped only 4 1/2 percent so far in 1990, it hardly tells the story. Since the Dow is chock full of institutional darlings, they stayed the course.

More normal folks own the transports (down 22 percent) or a broader based group of stocks such as those in the Value Line (down 24 percent). That’s if you were lucky. Many other less popular, but still widely held secondary stocks were down on the order of 40 percent. Good grief, then there’s the banks and S&Ls down 90 percent and more.

Interest rates fooled a few people. While long-term Treasury bonds did fall to 8.3 percent from more than 9 percent mid-year, the full year shows that interest rates rose in the long run. These are the important rates to finance a nation.

On the short end, the Fed is trying real hard. Rates for three month T-Bills fell to 6.5 percent from 7.5 percent. At year end we find the Fed trying to stimulate demand by easing off on interest rates, but the people and system unable or unwilling to borrow or lend as before. Excessive debts continue to cast a pall.

Which leaves the economy in limbo. On one hand there are genuine problems; on the other folks are cutting back just because they heard there’s a problem. Savings rates have picked up, and really there are more good things going on than meets the eye.

Increased savings and some good news could combine to give the economy — and perhaps the stock market — a good lift in the new year. Longer term trends, however, seem more firmly tied to the unwinding of more of the debt and the real estate, junk bond and other problems that go with it.

To say nothing of the wild card of the Middle East. While it could change everything, the fact we don’t have the money — or haven’t established the spending priorities to finance a long war — seems self limiting.

From my seat, the debt crisis looks as if it will continue to unwind in 1991. For the economy, we always seem to muddle through despite legions of doomsters and reasons to agree with them. I don’t know how we’ll get out of all we’re in, but I suspect we will succeed somehow.

If given the choice, it usually pays to stay optimistic — and I am.

Paul Jarvis is a stockbroker in Bangor with A.G. Edwards