I think that far too often we are all bombarded with numbers that are so large we really can’t conceive of how big they really are. Try to picture in your mind a trillion dollars. I consider myself to be excellent with numbers and I cannot even picture that number in my brain. While a million sounds like a billion and a billion sounds like a trillion these are monstrously different numbers.
When we hear headlines like consumer debt in the United States has reached $4 trillion for the first time or, when throwing in mortgages, etc. the debt rises to over $13.5 trillion we might say “wow!” but how many can conceive how large these numbers are? This is in ADDITION to the $22 trillion owed by the federal government, the trillions owed by state and local entities and the debt that doesn’t get counted like underfunded pensions and unfunded liabilities. Oops, I almost forgot to add in the record debts that have been run up by both domestic and foreign companies as well.
Many may say that they already know these numbers and nothing too bad has happened yet so why not just keep playing the game. My answer to this is that if you choose to do that it is likely that the approaching cliff may catch you by surprise and you may not be able to handle the fall if you go over that cliff.
Let’s keep in mind that it is highly unlikely that the federal government will ever pay off the $22 trillion that it admits to with a dollar being worth anywhere near its value today- particularly when trillion dollar (6 trillion GAAP) budget deficits are projected for as far as the eye can see. Keep in mind that there are many companies that cannot service their debt today without issuing new debt to pay it. These are known as “Zombie companies”.
Of the 480 million credit card accounts in the USA 37 million are “seriously delinquent”. More than 7 million auto loans are “seriously delinquent”. Many states would be “seriously delinquent” in payments if there was a category for that. (1)
Again, many may say there is nothing we can do about that and it is not affecting me at this time anyway. To that I have to say- open your eyes folks.
Cities and states are raising taxes and nuisance fees all over the place. Things like gas taxes and taxes on downloads (Chicago) and cable bills are being added by municipalities so they can try to stay solvent. When cities and states go bankrupt you notice the roads don’t get repaired as often, the police are out in force (along with cameras like in NYC and other places where their corruption is catching up with them as we speak. There is conversation in the mainstream media about the possibility of NYC going bankrupt- what a shocker!)
Student debt has risen to over $1.5 trillion and $166 billion is “seriously delinquent”. My mom’s pension in the state of Illinois is funded at 39%- with stock and bond markets near all-time highs. And, of course, in the “greatest economy of all time” LOL. (2)
78% of American households are living paycheck to paycheck. Probably the level of debt being carried everywhere is a major reason for this phenomenon.
So what is the point? The point is that we are seeing a slowing economy globally. We are seeing layoffs that should worry just about everyone from restaurants to retail outlets to manufacturers. In February layoffs were 117% higher in 2019 than in 2018- let that sink in. If people are living paycheck to paycheck and get laid off they are only a few weeks from real problems. (3)
I have laid out many statistics in the past few weeks that suggest that the global economy is slowing down meaningfully which means less economic activity, less shipping, less production, less purchasing, and ultimately less of a need for labor. Buckle up!
Let’s also keep in mind that debt allows us to have things today that we pledge our future income to pay off. The idea of debt is to bring consumption from the future to the present. As long as more debt keeps getting created you can continue to move consumption from the future to the present. So far, it appears that globally we have moved over $250 trillion of future spending to the present up until now. Of course, this does not include social promises or personal debts so the number is far higher- probably so high that it would be virtually be impossible to get a correct number.
What happens if that “future income” fails to materialize in a worse-case scenario or is greatly reduced because the economic pie is contracting rather than increasing?
To all of those that think the debt can be written off without too many problems keep in mind that one man’s debt is another’s asset. The person or entity holding that “asset” is expecting to be paid. Non- payment could cause a myriad of problems in the real economy like counterparty risk, bankruptcies, defaults, etc.
Let’s also keep in mind that much of this debt is not good debt- debt that would have a cash flow to retire it at a future date. No, most of this debt has already been spent and there is nothing to show for it but a liability for its issuance and payments for a number of years with interest attached. This alone should be concerning because it virtually means that a pullback can not be allowed to happen at any time. To me, this just means that it is only a matter of time before that cliff arrives.
The world is run by cycles. We have the seasons, we have high and low tides. Throughout history there is a record of booms and busts in economies. The central planners have proven that they can delay cycles from playing out with extraordinary measures but they cannot prevent the cycles from playing out indefinitely. Even if it seem that way at times!
We may have reached a point where we have moved so much future purchasing power to the present- particularly in the past 10 years where we have been spending like drunken sailors to cover up the fact that we can’t pay our bills without either creating “money” out of thin air or issuing more debt to retire old debt that we may have reached “peak debt” where more debt may actually contribute to the slowing economy that we see in virtually all of the economic numbers we see coming out globally.
Of course, I am only talking about the Federal governments who can “print” money to pay bills. States, corporations and individuals are not afforded that luxury and when reality rears its ugly head the problems will probably show up here first.
As I am writing this the Fed has just announced that we should expect ZERO rate hikes in 2019 and the reduction of the balance sheet will be reduced in May. To me, this is more proof that the cliff is closer than many may think. Just a few months ago we were expecting 4 rate hikes in 2019 and a normalization of the Fed’s balance sheet. Now just a few months later the financial game shows are pondering when the next round of QE will take place.
It is quite unusual to see stocks and bonds BOTH rallying after the Fed’s latest decision. Historically, stocks and bonds have moved in opposite directions- just another clue that all financial assets appear to be correlated (moving in the same direction at the same time) which is not a good sign for anyone expecting their bond holdings to hedge against a fall in stocks. Asset prices are rising and falling in unison which is historically unusual but has been the norm in the past 10 years as the central banks have become “the markets”.
I am expecting a weakening dollar because of this admission (stated openly or not) that the Fed has turned to propping up markets again and that it appears they are willing to “whatever it takes” to steal a line from the ECB’s Mario Draghi. This should be bullish for most assets- I think mainly foreign assets, gold and silver while it will likely hurt most of us where it hurts the most- in our pocketbooks as prices will probably begin rising shortly. Hopefully I am wrong about that. The weakening global economy may give us some relief from inflation in the short term but to me the writing is on the wall. Look for BIG changes going forward. As always,
- Federal Reserve
- Forbes (Student debt and 78% figures
Financial Advisor, Raymond James Financial Services, Inc.
2642 Route 940
Pocono Summit, Pa 18346
Raymond James Financial Services does not accept orders and/or instructions regarding your account by e-mail, voice mail, fax or any other alternate method. Transactional details do not supersede normal trade confirmations or statements. E-mail sent through the internet is not secure or confidential. Raymond James Financial Services reserves the right to monitor all e-mail.
Raymond James Financial Services and its employees may own options, rights or warrants to purchase any of the securities mentioned in the email. This e-mail is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this message in error, please contact the sender immediately and delete the material from your computer.
Any opinions are those of Mike Savage and not necessarily those of RJFS or Raymond James. Expressions of opinions are as of this date and are subject to change without notice. The information in this report does not purport to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources deemed to be reliable but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only be a small part of a diversified portfolio. There may be sharp price fluctuations even during periods when prices are overall rising. Precious metals, including gold are subject to special risks including but not limited to : price may be subject to wide fluctuation, the market is relatively limited, the sources are concentrated in countries that have the potential for instability and the market is unregulated. Diversification does not ensure gains nor protect against loss.. Companies mentioned are being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk regardless of strategy.