The real story for many more Americans is that the municipalities are in deep trouble and struggling for survival because of their debt load. As a result of this, their interest rates and the cost of insuring their debt have been rising while their credit ratings have been sliding. The net result is a rapid decline in their borrowing which directly affects their infrastructure spending and all the jobs which depended on it. The folly of the concept of borrowing to consume is being understood by city managers and so they are changing their ways. The net result is much less spending going forward. They already borrowed from today's budget 2, 5, 10 years ago so the consumption of today must be reduced dramatically in order to pay for prior consumption. It doesn't take much looking around to see the effects. For example, Cisco's CEO is being very forthcoming about why its earnings are in a slump saying, "public sector spending remains depressed in the United States and elsewhere...".
The sad thing about borrowing to consume is that everyone else is likely doing it at the same time. That means a lot of credit based money is created from thin air and is then pushed into the market where it chases up the price of equipment like Cisco's routers and infrastructure equipment. So not only did cities go into lots of debt, they did so while paying top dollar for the equipment. In other words, they over paid for the infrastructure they got.
As credit based demand diminishes, so will prices because buyers set the prices in the market place, not sellers. Falling prices lead to falling revenues and less product development which means layoffs. You can clearly read that writing on Cisco's wall in the above link. They will double down on video conferencing and cut other lines. I know that Chambers is not perfect as a CEO. I know that Cisco played Dot Bomb for all it was worth, participating in a massive vendor finance scam "selling" equipment to customers like the Russians which it had to know could never pay. It eventually resulted in a 2 billion dollar write down for bad inventory management (cough cough) - an unprecedented number at the time. However, since then I think Chambers has been a lot more honest with investors which of course has not been good for its stock price. After all, honesty is the enemy of any debt Ponzi. Of course those who are honest the soonest will most likely be the survivors and the thrivers over the long run. Having said that, Chamber may want to tone back the negative rhetoric for awhile because the CSCO stock chart is not looking good.
After the initial collapse following Dot Bomb, the shares got a short covering bounce back up to just about the level of the 38% fib before rolling over. At this point a very nasty head and shoulders could be forming. If that declining neckline breaks down then the shares could return to the fair valuation for a stock that only pays a 24 cent per share annual dividend. Assuming a 5% dividend return is what investors will demand in the future, that comes to a share price of $5. Given that our inflation is at least 5%, why would anyone store their money in a stock that doesn't return at least that much on a dividend basis? Perhaps they might do it hoping for share price appreciation based on greater fool theory. If so, good luck with that strategy going forward.
