Of all the stuff I have been reading in order to try to get a feel for my 2013 prediction, these 2 charts kind of sum it up:
Historical Debt to GDP
So this chart provided in an article by Bond Fund guru Bill Gross ) says anytime the deb to GDP ratio gets above 90%, growth slows, and inflation increases. Debt to GDP in the us is now above 90%, so assuming this whole fiscal cliff situation gets resolved, and results in tax increases and or spending reductions which reduce the deficit, one would have to assume this austerity would have a negative effect on growth. I am still skeptical that inflation will increase – I go back to my Japan Economics post to believe that inflation wont reignite.
Couple the above chart with this chart provided in the presentation by MaryMeeker :
Given the growth of consumer debt, especially student loan debt, how much longer can the consumer go before deleveraging must begin? If we assume the consumer wont be growing debt much more in the next few years, one would have to assume the consumer wont take up the slack if and when government deleverages.
So I am not looking for much earnings growth in 2013. I don’t think the stock market will have as good of year as 2012, however it wouldn’t surprise me if the market does better than bond yields. However this all changes if government continues to go into debt – at which point I would consider reducing exposure to bonds increasing exposure to inflation defensive assets such as gold, real estate and commodities.
So keep an eye on what goes on in the next few months – it should be an interesting year.