THIS IS MY 179TH BLOG ON UNDERSTANDING MONEY
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November, 2019
This is a blog on our ballooning debt that has caught up
with us, and the world…and what is worse, no way out. The scary week of Halloween has come and gone.
So, this is an appropriate time to write about our very scary
economy. As I repeat over and
over, everything is “cause and effect”.
(If you want to read a lengthy recap of our country’s debt go to my
website and view blogs 133 through 145.
It is about 51 pages, however a worthwhile recapping our accumulation of
debt mainly because of wars from 1772 to current time.) My other favorite quote is “that
perceived value is greater than real value” and our government uses it daily.
Well, we are now showing a government deficit of over $23 trillion. As of the first week in November we slid into another
benchmark of debt. I am not
blaming the president, but he did say he was going to balance our budget. As I have always stated we reached a
point of no return around the year 2000.
During Mr. Trump’s reign in office, which is now 2 years 10 months, we
have increased our US debt by $3.4 trillion. (Please Google the US Debt Clock if you want verification.)
One of my biggest concerns is the extent and broadness of
debt. How long before the world
will not accept our currency as the dominant world trading currency? In 2008-2010 the crisis was brought on
by our lending policies, narrowly focused on the real estate industry and
speculation. Now, the debt crisis
has greatly broadened into other fields.
Let’s first discuss “sub-prime loans”, and then talk about
current financial topics that may not come across normal business news.
The new and fastest growing sector of lending is “sub-prime”
loans. What are sub-prime
loans? These are loans made to
people who may have trouble paying back loans. These are people with very low credit scores, poor track
records of paying back loans and people who frankly “just can’t get a loan from
a bank”.
There are tons of companies that will do sub-prime lending,
some reputable, some not. Let me
name a few just in the mortgage industry today: Angel Oak Mortgage, JMAC
Lending, Citadel Servicing, Athas Capital and many more. If there is no collateralization
substantiating a loan, interest rates can be extremely, if not ridiculously,
high so that a borrower has little chance of paying off the loan; these can be
over 100% interest! Some states
have usury laws regulating the amount of interest that may be charged on a
loan, constraining excessively high rates of interest. However, many states do not have such
laws, and lenders can charge what they want.
Since the banking debacle in 2008, these sub-prime loans
have grown to well over $1 trillion.
Let’s move on to another topic of financing concern; this
being in the auto business, and manipulation of lending. Auto loans are now about $1.5
trillion. What is moving people
into more debt here? You want a new
car, but they depreciate the moment you drive the car from the dealership. Dealers offer cars with essentially no
money down except perhaps a few closing costs. If you have an accident within months of the new purchase
you may be out thousands of dollars.
Get “gap insurance” to cover the difference between what the car has
depreciated, once it leaves the lot, and the original loan amount. A new car is no more than a used car
with low miles once you leave the dealership; this could be 15% less within a
few months. Dealers are now
offering to lend more money than what your car is worth if you purchase a new
auto. Example: You purchase a new car for
$30,000. After one year that car’s
value is $21,000 or a decrease of $9,000.
Your loan is at $27,000; you are “upside down”. The dealer offers you a new car for
about $30,000, (as he needs to sell cars), and your monthly car payment went
from $249/month to $310. You say
you can afford $310/month so you go ahead. What you don’t realize is the dealer is pushing that loss of
$6,000 forward into your new debt.
Let’s discuss meaningful new financial information. To save space and keep this concise I
will use a question and answer format.
See if you know the answers, before reading my answers.
- Question:
We increased our US debt using “off balance sheet” financing $1 trillion
starting September 22nd of this year. Why?
- Answer:
Because our largest 6 banks again could not meet capital requirements, and the
wealthy were selling out of the stock markets. We infused capital into both.
- Question: Regarding above, how is this financing
accomplished?
- Answer: The president along with our Treasury
Department issued bonds (debt).
This is in conjunction with our Central Bank, the Federal Reserve. The Federal Reserve bought these bonds
and currently holds about $4 trillion of our debt.
- Question: Will this be the end of needing more
capital to once again save banks?
- Answer: No. Just recently, on November 8th, it was announced
the government needed to put another $60 to100 billion into our banks and
markets. The statement used by the
news is to “stabilize and calm the markets”.
- Question: Mr. Trump has stated that if he is not
re-elected the stock markets will crash.
How can he make such a statement?
- Answer: The next president may not put the
trillions of dollars needed to hold up false impressions of strength,
(perceived value). It may be
better to let free markets intervene.
- Question: Why is the government doing this when
in the long run it is illogical?
- Answer: People think they have more money, have
done well in the stock market and therefore will go out and spend money in the
economy and borrow more money rather than retract and pay off debt. This is how Gross Domestic Product
(GDP) is created.
- Question: The stock market is doing so well, what
backs my monthly statements? Why?
- Answer: Quite simply. Let’s take our safest stocks and that would be the 30 stocks
in the Dow Jones Average.
Historically, and only a decade ago, the average price to the earnings
in the Dow has/had been 15 to 1.
This is a multiple of 15.
As I write, the Dow today has a price to earnings ratio of 29.3 to 1. Therefore, the fact is that currently
the stocks in the Dow are priced twice as high as they should be for
conservative stocks, and earnings have not kept up with the increase in the
price of stocks. Besides the
government “feeding” the stock markets, companies have been using low interest
rates to borrow billions of dollars and buying back their stock. This increases stock prices.
- Question:
You own stocks and stock funds.
What is the real value to these assets?
- Answer: Nothing, gar nichts (if you speak
German), nada! Okay, this seems
irrational, but it isn’t. Without
a buyer at a certain price stocks have no value. If no buyers or sellers in the market place you own
nothing. If we have a deep
recession you might get back 30% of your money, that is a 10 to 1 P/E for the
Dow; worse with other markets like NSADAQ. The Dow is at 29.3 to 1!! Let’s explain further.
There are basically three types of investing in companies, those being
bonds, preferred stock and common stock.
Most likely you own common stocks, which mean if times get tough you are
the last in line for any money.
First in line are bond holders, but they are debt holders given an IOU
for a certain hold period and interest rates, not a dividend. Next in line of security, if there are
any assets, are the preferred stockholders and most likely receive a dividend
of some sort. Lastly, and most
common, is where you enter the picture and that is with common stocks. So, you see, you are only holding paper
and a statement that states a monthly worth. The worth is nothing until someone is “willing and able” to
buy you out and you convert your stock to cash, or a currency. When times get tough there is usually a
wealthy investor that enters the picture at some point as a buyer.
- Question: The Federal Reserve has lowered
interest rates a couple of times this year. Why is this both good and bad? Why are they doing this?
- Answer: Inflation is not a threat as we keep
buying inexpensive goods from abroad, like China. We are buying more than ever, so trade tariffs have not held
back the average Americans buying of goods. It has hurt us in the farming and manufacturing sectors more
than foreign countries selling to us.
The lowering of interest rates brings down the interest rate we pay for
our government debt instruments, bills, notes and bonds. Bond rates will affect real estate
mortgage rates. The negative to
this is that it hurts older people who should be on fixed incomes with savings
accounts, money markets and bonds.
- Question: Some countries have actually gone to
negative interest rates. What
countries and why?
- Answer: Here are some of the countries where
you pay to hold bonds or fees banks charge for holding cash: Japan, Sweden,
Denmark, Switzerland, and the rate you pay is around 1%. In general, world economies are not
doing well so people with money go to a cash position or bonds.
- Question: We are dropping interest rates, might
we also go negative?
- Answer: There is a good chance of this as the
wealthy keep going to cash and flee risky investments. This also makes our middle class more
willing to borrow and spend money.
Currently, Mr. Trump is advocating the Federal Reserve to drop interest
rates to compete with other countries. The Federal Reserve is backed by
private, wealthy investors. I’m
not sure how happy they would be with this.
- Question: Other countries like in Europe can’t
borrow like we do. What are some
differences?
- Answer: They are more conservative. Let’s take credit cards for an
example. Master Card, Visa and
American Express are worldly accepted.
In Europe a person can get any of these cards issued by banks, however
you cannot carry-over a balance month to month. You need to pay the balance in full each month, or you lose
your card. It puts less stress on
their banks, and people show restraint on spending.
- Question: So how bad is US consumer debt?
- Answer: Right now it stands at approximately
$14 trillion, and a lot is not collateralized debt.
- Question: The government touted last month that
unemployment is down and we have 158 million people in the workforce.
- Answer: Numbers lie, and are meaningless. First, these are not necessarily people
but W-2 employee filings and 1099’s for contract workers. Many people today
work more than one job so they are counted each time they become an employee or
contract worker. Secondly, working
doesn’t really mean a thing, it’s all about how much you earn so you have money
to spend. Our average worker’s pay has not gone up, taking inflation into
account, over the last 40 years!
- Question: Last quarters growth was at 1.9%, is
that good.
- Answer: Not really. A good growth is around 4% for this country and we have been
declining for several months now.
Inflation is about 2%. Both
these figures are not really very reliable by our government. Example would be on inflation. If agricultural goods go up (which you
know they do when going shopping for groceries), the government excludes
them. Another omitted stat is
petroleum products and gasoline.
- Question: What are the numbers for new immigrants
coming into this country. They
need everything so they will spend; is this not financially good?
- Answer: The government recently reported that
we had 550,000 immigrants enter the US in 2019. How many entered illegally? Many, many more.
Yes, these immigrants spend money, but for the most part they are
getting the money from us at approximately $20-25,000 per person a year. I would say this is false economy.
I hope you got something from this blog. The facts I render are from reliable
sources and I believe to be accurate.
Bottom line is the audacious manner in which the government is spending
money will catch up to us. I
thought it would be long time past, however “the can keeps getting kicked down
the road”! Some day the beans will
spill out of the can!
