10 years since the housing market crash and we may still be facing economic problems in this area. Are we going to recognize the signs and make a change or are we going through the same motions? Keep reading to get a financial consultant’s thoughts on the matter. Get in touch with Savage Financial today for expert advice and guidance.
I remember it was August of 2007 and I was visiting my family in Illinois. It was a usual trip that we take but in August of 2007 we got the first hints that something was drastically wrong in the economy. At the time it appeared that we were headed for a sharp pullback in the stock markets. It was far from a carefree few days that we spent there.
In my opinion, the important thing to remember here is that all the signs were there a full 14 months before the real carnage began even though the averages were rising and falling but moving virtually nowhere for the rest of 2007 and were flat to down in the beginning of 2008.
All the way along we had those in charge- like Ben Bernanke telling us that all was well. Remember- the prices of homes ONLY go up and the subprime mortgage problem was “contained.”
Many who were warning at the time that something was wrong were virtually laughed off the air at CNBC and the other financial game shows. Actually, just a few days before Bear Stearns went bankrupt Jim Cramer was telling his audience to “load up!” There were also people who actually believed that all was well. The formerly highly thought of Bill Miller of a well-known fund company was buying Fannie Mae and Freddie Mac all the way down to zero. The result? His fund lost 99% of its value in 2008-9 and his well-deserved good reputation was ruined. Of course, in the last few years- he’s Baaack! What SHORT memories we all seem to have! Again, the same actors are touting the “strong” economy while touting made up employment and unemployment numbers as well as GDP and inflation numbers that bear little resemblance to what we real people in the real economy continue to see with our own eyes.
While this August seems to have some similarities to August of 2007 I would say that problems have been evident since at least 2013 and really evident since February of 2018. Since February of 2018 there have been sharp pullbacks and rallies in the major US stock indexes and they have basically gone nowhere. Also keep in mind that just a few stocks are responsible for most of the rallies and most of those are rising because of central bank purchases and stock buybacks by the corporations themselves. (Forbes, CNN Money, Money GPS)
Of course, most other markets are down around the world and there is major stress in emerging markets as well as in not so emerging markets like China, Russia, Brazil, Turkey, etc.
There is also evidence, according to Gregory Mannarino, that there is MAJOR buying of US Treasuries to keep the rates from spiking higher. There are also reports of Turkey and Russia dumping their US Treasuries. In Russia’s case they sold virtually ALL of their US Treasuries ($100 billion) in 2018. Just in the month of July Russia bought 800,000 ounces of gold with some of those proceeds. (Zerohedge 8-21-2018)
Keep in mind that China, India, Russia, and many others are stockpiling gold while they are actively trying to set up systems that will allow them to bypass the US dollar in their international trades. The Chinese Oil Exchange that trades in Yuan is just one such vehicle that is gaining major traction.
I wrote a few years ago that a major sign that the end was near for the US dollar would be if Germany was to pivot East towards Russia and China. While that pivot may not have taken place just yet there was a major signal that we may be on the cusp of a major change.
Writing in the newspaper Handelsblatt Heiko Maas (Germany’s Foreign Minister) called for a “New payments system Independent of the US”. In the Financial Times “Europe should not allow the US to act over our heads and at our expense. For that reason it’s essential that we strengthen European autonomy by establishing payment channels that are independent of the US, creating a European Monetary Fund and building an independent SWIFT system”. The SWIFT system is a US-dominated clearing system that makes global payments in US dollars.
Recently, the USA has used the SWIFT system as a weapon against Iran and others even threatening to cut Russia off from clearing payments through SWIFT. This is likely the reason that China, Russia and now it appears Europe are all working on alternate payment systems to avoid the weaponization of the global payment system.
My opinion is that this type of outcome is as bearish for the US dollar going forward as any outcome could possibly be. The supply of dollars and dollar-denominated debt continues to climb to unimaginable heights (Increasing supply) and the demand, while still robust as I write this, is under a constant, steady and coordinated attack by BRICS countries as well as newcomers to this club- Turkey, and now possibly Europe led by Germany.
While the US dollar has been undeniably strong recently, to me it appears to be nothing but a dead cat bounce or a last gasp before the rest of the world fights back. Let’s face it – a strong US dollar is toxic to everyone including our multi-national companies and anyone trying to keep stock markets elevated. It is most toxic to those that issued and carry US Dollar denominated debt and their currencies are falling in value against the dollar- thereby increasing their debt payments without any additional assets to show for it.
While gold and many commodities have been weak recently- in part because of a strong dollar and in part because of financial shenanigans taking place at major banks and at the COMEX- it appears to me that if the dollar were to come under pressure because of those involved in international trade bypassing the dollar the demand for all of those newly “keystroked or printed” dollars could collapse. With the supply increasing as our debts increase and demand falling Econ 101 says a lower US dollar price should lie dead ahead.
Of course, the timing of all this cannot be known by we regular people but anyone who failed to learn any lessons from the last two downturns I guess will deserve what they are going to get.
Anyone counting on a traditional stock, bond and US dollar exposure to help you in this next downturn is likely to be disappointed if you haven’t at least diversified into some real assets that can provide some assets that are not correlated to the stock and bond markets.
Notice that I mention stock and bond markets. Back in the old days- prior to the year 2002 stocks and bonds generally moved in opposite directions. In times of stock weakness you could, in most cases, expect your quality bonds to have gains and lessen the pain. Since all assets rose together from 2003-2007 all assets fell together in 2008-2009. The traditional asset class mixes proved to be a myth that ended with the interventions of central banks into the markets.
While the central banks maintained control asset prices rose. When that control was overwhelmed by asset destruction (Bear Stearns, Lehman, and all major banks that took over $16 trillion to re-liquefy according to the GAO) financial assets fell- HARD. And all at the same time providing no real protection virtually anywhere.
While we can’t expect the next crisis to be the same as the last I do believe we can learn some lessons from the last two. Do you own anything “REAL” or are your assets all paper?
Mike Savage, ChFC, Financial Advisor
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