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Share the Wealth – May 29, 2018

 
 
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Registered Investment Adviser Caleb Lawrence

Growing political and banking crises in Europe and a deteriorating Asian trade picture spooked the markets in early trade sending them into the final hour with substantial losses.

The Texas regional manufacturing index jumped 5 points in May to 26.8 on strength in production and employment. So far fracking and the tight energy complex continues to drive manufacturing but sooner or later a lack of profit and way too much debt will cripple the sector.

The CoreLogic Case-Schiller 20-City home price index gained 6.8% from a year ago in March. The national and 10-city indexes also continue their upward trend following a brief pause seen last winter. At the city level Las Vegas and San Francisco lead on a year ago basis with gains of 12.4 and 11.2% respectively. From the previous peak in late 2006 Denver is #1 with a 54.2% gain, followed by San Francisco with a 20.7% advance. That said Las Vegas, Miami, Chicago, Washington and New York all remain below their previous highs.

One of the hallmarks of market activity in the post crisis period was the prodigious use of debt in addition to free cash flow by public companies to issue dividends and buy back shares. This has led to a 30 trillion dollar or 63% increase in corporate debt since 2007, much of it junk, covenant light paper that has so far held up remarkably well. Not to be out done US Federal debt has risen even faster notching a 29 trillion dollar or 83% gain over the same period. The Chinese however have managed to blow a debt bubble for the record books with a 500% increase when they went from 6 trillion to 36 trillion Dollars. Record debt, steadily declining credit quality, and much higher interest rate are a toxic combination.

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