THIS IS MY 177TH BLOG ON UNDERSTANDING MONEY
TOOLS
October, 2019
This is a blog on stocks and the economy. I had an epiphany this week, not at all
about religion, but the stock market.
As you know, I write about facts that should have certain
expected results; cause and effect.
Not currently holding true, nor for quite some time. The stock market may actually go
up! Why? A few factors.
It does revolve around money and the Feds; not so much from buyers and
sellers in the market place, and other things.
As stated in previous blogs, big money, “the wealthy” have
pulled back from the stock markets into safe havens. This amount of money is flowing into secure investments in
countries like Switzerland and Germany, and has resulted in those countries
issuing “negative interest” investments like bonds. The supply of money is so great that they do not have to pay
interest. Also, their economies are weakening so corporations may borrow at low
rates of interest.
In the last couple of weeks, our biggest banks, funding the
economy and stock markets have not met their capital requirements. Banks are in trouble as in 2007-2008,
but not nearly as bad. A lot of
bad loans out “there”. I am making
an assumption that part of this loss of capital by the banks was from their
buying huge amounts of stock in our markets to “stabilize and calm the
markets”. By executive order from
Mr. Trump our government could issue a mandate to change the financial
situation of banks and markets.
(This is in accordance with an Act of Law passed in March, 1988).
The first step by our government was an infusion of capital
on December 22, 2018. The Feds
started this to “stabilize and calm the financial markets”. Around September, 20th of
this year it was announced by the government that they would pump money into
these same banks as they were underwater on capital requirements. One of the first indications was the
“repo” rate for banks shooting up to 10%.
We have covered repos in past blogs, but a quick recap is that bank
repos (repurchase agreements) are short-term (many times overnight) loans to
banks by the Fed so they can shore-up capital. The banks usually pay off the loans the next day.
The volatility in the repo rates could effect the bond
markets as well as the investment bank costs and rates on margin accounts.
The instability of the stock markets and the banks led the
Federal Reserve in conjunction with our Treasury Department to continue capital
infusions to stabilize the monetary system including both banks and markets
beginning about September 20th of this year. It started with 3 infusions totaling
about $150 billion. This infusion
of money will continue to the tune of $75 billion per day ending October 10th. That is about $1 trillion, and I bet
the government keeps this “off balance sheet” to make our financial/reported
situation appear better than it is.
What is “off balance sheet”? The government and corporate sectors do this quite often to
hide actual costs. An example of
our government doing this is with all the wounded in war coming back to the US
for sustained medical care. Most
war costs are accounted for in the defense budget, however not the medical
costs in the billions.
Banks have been noted doing “off balance sheet” lending as a
favor to large customers. They
keep it off books in separate accounts where the auditors will not account for
a questionable loan.
Going back to my epiphany, with this control over the
monetary system people may expect a continued rise in markets. This, of course, is conversely related
to our real economic situation, and a free market of buying and selling of
stocks. Apparently, debt does not
matter and is not being addressed at the moment. We have a great diversion from
government finance with the attempt to impeach Mr. Trump. If you add the above referenced infusion of dollars to our
deficit spending going into the new-year October 1st, we are looking
at about $2 trillion or more.
Another smaller realization that stocks might go higher is
that “emotions” by people around the world may enter into the picture. I am thinking of emotions like fear,
greed, passion, calmness, anxiety etc.
Fear is our strongest emotion and stronger than greed. In this case people may be “fearful”
they have been left out of the great run-up of markets since The Great
Recession. With bond rates, bank
CD’s and other secure investments yielding essentially nothing, people are
“fearful” and perhaps still willing to jump into the stock market.
In an election year, no president seeking re-election can
afford a down-turn stock market.
Big investors are sitting with cash or liquid assets waiting for the
next recession and downturn. The
middle-class investor is the one who is continuing to buy into markets with
funds like Vanguard and Fidelity.
When the wealthy do invest they have their own teams investing/managing
their money, not using the household named funds.
It was reported this week that the GDP is holding at 2%
growth, I doubt these numbers like most numbers coming out of our
government. In Michigan you have
the largest industry, auto-workers, on strike. This is taking billions out of taxes, and will soon have a
significant impact on businesses unrelated like restaurants, retail stores,
auto sales, etc. It is sad that
companies like General Motors will find the money to pay their Chairman and
CEO, Mary Barra, $22 million in bonuses similar to the previous year, when the
labor workers want more money. It
was also announced General Electric Corporation is freezing the pensions of
22,000 workers. This greed and
inequality will catch up to America.
When Mr. Trump came into office he promised a resurgence in
the coal industry, this has lasted only a short time and you have some of the
largest coal companies shutting down as in the Powder River Basin in Gillette,
Wyoming.
It amazes me how quiet the World Bank and International
Monetary Fund remain as the biggest indebted nation in the world, the USA,
becomes more indebted. One day it
will just implode.
Will we have a new Democrat as president and see Jubilee
years in 2021-2022? What will we
do with our debt and need for more money?
Everything is cause and effect, and we have certainly caused
our messes.
I hope you got something from this blog.
