MONEY 167 - MONEY

THIS IS MY 167^TH BLOG ON UNDERSTANDING MONEY TOOLS

June, 2019

www.understandingmoneytools.blogspot.com.

I’m going to open this blog with a couple of sayings, “if it’s too good to be true, chances are it’s too good to be true.” The second is the well known saying by Sherlock Holmes, “when you have eliminated the impossible, whatever remains, however impossible, must be the truth.”

We are going to tie this in to what I see in the markets this past year, month and week.  First, smart money has been fleeing equities (stocks) and moving money to bonds to a greater extent not seen in 10 years, since the Great Recession.  The “inversion curve” with bond margins became greater. (The short-term interest rates grew, and the long-term interest rates dropped. The interest rate on 3 month Bills was higher than 5 year Notes and 10 year Bonds.  This historically has been an indicator of oncoming recession.)  Now, the gurus say, this inversion curve no longer holds weight.  Everything being stated these days is to prop up the equities markets, so that it appears economies worldwide are great and people have more optimism and borrowing ability.

To note, the value of bonds in the secondary market is always inverse to the yield of a bond (or interest rate).  If interest rates drop on longer-term bonds the value of your bond goes up.  Conversely, if interests go up, your bond value will go down.  If money is seeking safety in bonds, Wall Street can  offer less in interest rates...same holds true with Uncle Sam and US Bonds.

If you have a bond index fund you will see “NAV”, that is the “net asset value” of the fund.  As interest rates decline it is best to be in a “closed end” fund for market value, as they aren’t buying newly issued bonds at a lower interest rate.  It’s just the opposite if interest rates are going up, invest in an “open end” bond fund.  Most of this is just good common sense.

During the last week in May, the stock markets weakened, as they should.  GDP is projected to be a bit over 1%, and added to that car and home sales are down.  Retailers were hammered in May.  Retailer’s stocks like J. Jill was down over 70%, Abercrombie and Fitch down 42%, The Gap down 27%, and so on.

Now, with that said, let’s continue and relate to my opening statements.  Through May economic stats looked sad.  Tariffs with Chinese and Mexican goods are some of the issues adding a further burden for more costly goods as a pass-through to middle America.  Sunday, June 2^nd, Scott Pelley, with 60 Minutes had a good interview with the Chairman of the Federal Reserve, Jerome Powell.  Mr. Powell needed to be very careful what and how he stated things about the economy, as Wall Street and investors quickly pick at the underpinnings.  His comments lead us to believe the economy is quite good and stable, with no recession and significant downturn in sight.  If you haven’t read my blog on the “who, what, where, when” of the Federal Reserve in Blog 164, I would recommend the reading.  A miniscule re-cap. The Federal Reserve was enacted in 1913.  It is a private bank, not held to authority of the US Government, but to assist investment and commercial banks and stabilize our economy and US dollar.  My old theory stands, “don’t trust any banks, they are not your friends!”  The Federal Reserve Bank has investors, and they would be some of the wealthiest people in the world; these people are not disclosed.  I assume the Rothschild family to be amongst those investing in most of the “world banks”.  Everything said and meaning from these banks would be for their best interests and to make money.

On June 3^rd, the Feds indicated that they may soften lending, and if needed drop interest rates.  They would only do this if they were quite concerned about an economic downturn.  This led the DOW Index up over 500 points in one day, June 3^rd.  Volume of stocks traded on the DOW Index was about average at $281 million shares.  Just the rumor that maybe a slight adjustment in interest rates may be forthcoming could take the DOW to an extreme is unusual.  Can’t realistically happen.  With smart money exiting to bonds where did this money come from so quickly?  Again, my assumptions are that the Plunge Protection Team (Act of March, 1988) entered the game infusing millions from our large banks and perhaps the Federal Reserve.  This Team is also called the “Working Group on Financial Markets.”  Things look good to Americans and their retirement plans, but are they in reality?

Mr. Powell stated that our commercial banks are in much better shape now than in the times of the Great Recession, and with implemented restrictions I believe they are.  A big question comes from the amount of bonds/debt these banks lent to large corporations with the Quantitative Easing money; a portion of about $4 trillion.  Large corporations have used this money to buy their own stocks, driving up the markets, versus spending on infrastructure and new equipment and manufacturing plants.  What happens to the price of their stock when, and if, a free market ever returns?  They bought in way too high, and America will have to bail them out.

I think the next recession is going to be a “doozy”.  Debt all over the place, and much of it has no collateral behind it.  This includes things like:

-       US debt at $22.35 trillion with only the faith of our country behind it.

-       Government pension debt at over $6 trillion, and underfunded.

-       Credit card debt over $1 trillion.

-       Student loan debt at $1.6 trillion.

-       Auto loans at over $1 trillion, and autos depreciate in value below amount of money owed.

Another type of debt and concern the country should have and Mr. Pelley and Mr. Powell never addressed is debt in the secondary market, and mezzanine debt.  This now accountants for over $1 trillion.  As said, after the Great Recession banks took on more restrictions and regulations from the Federal Government.  There was a need for loans that are sub-prime, and with smaller companies that could not get loans from banks.  This is where “secondary and mezzanine” financing comes into play.  The money comes from sources like private hedge funds, wealthy people and lending companies that get around banking laws and regulations.  With an economic downturn these smaller and fragile companies will not be able to maintain payment on loans.  The interest on loans, including mortgages in this secondary market are usually 2% to 3 % or more higher than a standard bank loan increasing the problems.

Labor/job creation.  Pretty solid for the first part of the year, but weakening and currently flat .  Private payrolls added a mere 27,000 jobs in May.

Here is another bit of government information not totally clear.  Manufacturing numbers were up the second quarter of the year, however the government only states that number, not how much of the manufactured goods went into inventory and not sold.  That is another picture.

Would dropping the interest rate 25 or 50 basis points really help in the whole picture?  I doubt it.  Everything cycles and we are way overdue.  Can the government and Mr. Trump hold this cycle at bay until after the next elections?  That is a good question.

Here are a couple ideas to help you now:

-       Get another credit card or two with free interest on new purchases until 2021.  These are not collateralized loans.  With good credit you can usually get a $5-10,000 card.  Transfer in balances from your cards currently charging interest.  You will need to pay monthly principal on balances.  You have the card, you don’t necessarily need to use it….just in case.

-       I know people 55 years and older going back to college for the intent of getting a nice student loan paying out monthly.   If you want, be a professional student.  With no other income coming in the repayment fee is minimal.  I would not encourage this, but I know some people will never return the payment of loan, and become an “ex-pat” moving to Mexico or another country.