By
Wade
Slome
:
If the U.S. was a company, would you buy, hold, or sell the
stock? A voluminous report put out last year by Mary Meeker sought
to answer that very question. Since we're in the thick of the
presidential elections, why not review the important financial
state of our great nation.
For those of you who may not know who she is, Mary Meeker is the
well-known partner at Kleiner Perkins Caufield & Byers, who is
also affectionately known as the "Queen of Internet." Apparently,
beyond her renowned expertise in analyzing and valuing tech
companies and start-ups, she also has the knack of dissecting
government statistics and distilling wonky numbers down to
understandable terms for the masses. "Distilling" may be a generous
term, given the massive size of her 460-page report,
USA Inc.
, but nevertheless, I am going to attempt to synthesize this
gargantuan report even further.
As a visual learner, I think some key cherry-picked slides from
her report will help put our multi-trillion debts and deficits in
context, so here goes…
The Scope of the Problem
If one spends a few hundred billion dollars here, and a few
hundred billion dollars there, before you know it, a trillion
dollars will have piled up. Currently our government has run $1
trillion+ budget deficits for three years, and the estimated
deficit is for another trillion dollar deficit this fiscal year. If
you have ever wondered how many football fields it takes to fill
with a trillion dollars of cash, then today is your lucky day. The
answer: 217 football fields.
Click images to enlarge
(click to enlarge)
Financial Statements: The Health Thermometer
In order to determine the relative health of USA Inc., Meeker
created financial statements for our country, starting with the
income statement. As you can see from the chart below,
unfortunately USA Inc.'s expenses have been significantly larger
than its revenues, creating a "discouraging" trend of negative cash
flows (deficits). An entity that takes in $2.2 trillion in revenue
and spends $3.5 trillion, cannot sustainably continue this trend
for long, before significant financial problems arise. The largest
contributing factor to our country's losses (deficits) has been the
exploding costs of entitlements, including Medicare, Medicaid, and
Social Security.
(click to enlarge)
As the pie chart shows, the major categories of entitlements
comprise a whopping 58% of USA Inc.'s 2010 total expenditures.
(click to enlarge)
Trillion dollar deficits have been the norm over the last three
years.
Why Entitlement Spending is a Problem
Why are entitlements such a massive problem? The plain and
simple answer to why entitlements are a major issue is that
government expenditures are growing too fast. You can't have
expenses growing significantly faster than revenues for 45 years
and expect to be in happy financial place.
(click to enlarge)
Another reason for the abysmal spending record is due to
politicians' horrendous forecasting abilities. Future promises are
made by politicians to garner votes today, and when they make
overly rosy estimates about the costs of those promises, future
generations are left holding the underfunded bag. Meeker points out
that when Medicare was instituted in 1966, total future spending of
$110 billion turned out to be about 10x more expensive (see chart
below) than originally planned…ouch!
(click to enlarge)
No Defense for Defense
Trillion dollar deficits and debts can't be solely blamed on
entitlements, but $700 billion in annual defense expenditures is
not exactly chump change. The inopportune timing of the financial
crisis in 2008-2009 didn't help either, while two unfunded wars
were being fought. Even if you strip out the wars, defense spending
is still obscenely high. Given our poor state of financial affairs,
we cannot afford to be the globe's babysitter (see
Impoverished Global Babysitter
). Legacy Cold War spending on obsolete ground warfare needs to be
reprioritized to 21st Century threats (i.e. focus on unmanned
drones and coordinated intelligence). When a government spends more
than the top 25 countries combined (see chart below), that country
can certainly find some defense fat to trim.
(click to enlarge)
Demographic Headwinds
The out-of-control gluttonous government spending is a threat to
our national security, and although I wish I could say time alone
will heal our fiscal wounds, unfortunately the opposite is true.
Time is our enemy because the ticking demographic time bomb is
about to explode, unless government acts to solve our spending
problems. For starters, Americans are living longer, which means
entitlement spending has accelerated faster than revenues
collected, and life expectancy consistently continues to rise. As
you can see below, life expectancy has outpaced Social Security age
adjustments by +23% over a 74 year period.
(click to enlarge)
Another self inflicted problem contributing to our colossal
health care costs is the obesity epidemic. Over an 18 year period,
the rate of obesity more than doubled to 32%. Individuals can and
should shoulder more of the burden for these belt-busting costs,
and government should spend more on prevention and education in
this area. Bad drivers pay higher premiums for their auto
insurance, so why not have bad eaters pay higher premiums? Genetics
certainly can play a role in obesity, but so do eating habits. The
same accountability principle should be applied to smokers who
overly burden our healthcare system too.
(click to enlarge)
The USA spends more on healthcare than all OECD countries
combined and 3x the OECD per capita average, yet as you can see
from the chart below, the USA is not getting a life expectancy bang
for its buck. The argument that the U.S. has the best healthcare in
the world may be true in some instances, but the overall data
doesn't support that assertion.
(click to enlarge)
The Rubber Hits the Road
The problem is easy to identify: Government spending going out
the door is running faster than the revenues coming in via taxes.
The solution is easy to identify too: Politicians need to cut
spending, increase taxes, and/or do a combination of the two
options. Like dieting, the solutions are easy to identify but
difficult to execute.
(click to enlarge)
Source: Calafia Beach Pundit - Scott Grannis
Almost everyone wants the government to spend less, but at the
same time nobody wants their benefits cut. You can't have your cake
and eat it too. Citing two different studies, Meeker shows how 80%
of Americans want a balanced budget as a national priority, but
only 12% are willing to cut spending on Medicare and Social
Security.
The rubber will hit the road in the next few months when
politicians in a post-presidential election period will be forced
to face these difficult "Fiscal Cliff" choices - $700 billion+ in
tax hikes and spending increases that jeopardize the current
recovery and our fiscal future.
(click to enlarge)
Source: PIMCO
As market maven Mary Meeker recognizes, our fiscal situation is
quite "discouraging". With that said, although USA Inc. may have
earned a current "Sell" rating, Meeker acknowledges that our
country can become a positive turnaround situation. If voters
actively push politicians to making difficult but necessary
financial decisions to lower deficits and debt, investors around
the globe will be ready to "Buy" USA Inc.'s stock.
DISCLOSURE:
Sidoxia Capital Management ((SCM)) and some of its clients hold
positions in certain exchange traded funds (ETFs), but at the time
of publishing SCM had no direct positions in any other security
referenced in this article. No information accessed through the
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IC
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See also
SandRidge Energy: Huge Payoff Potential
on seekingalpha.com