Houston we have a problem . . .
As we go about our day-to-day lives most of us are not in tune with the ebbs and flows of capital in the marketplace. Sure, there are some professionals on TV commenting here or there about things, but in the end it all sounds more like iconic comic book character Charlie Brown talking to his teacher and only hearing that incomprehensible babble that leaves your head spinning.
Although they appear to be speaking English, most news programs are filled with distortions and doubletalk that leave the listener even more confused. The reason for this is that they are always giving themselves an out.
Is the market going to go up or down? Standard answer is “it depends.”
You see, this “no answer” answer strategy has become more and more pervasive as we have moved into the media age where everything is recorded. That old article, that out-of-context joke, that picture on spring break—anything can come back to haunt even the cleanest among us. And for the dirtiest among us the standard operating procedure is to say something, but not anything that someone in the future can use against you. So in essence, say nothing of value to a listener.
As a writer for this column I will do my best to present to you the very best information without any spin or hedging. When making an observation my policy here is to tell the truth to the best of my ability without holding any punches. So here goes . . .
The Fed is losing control of the bond market.
That’s right. The mighty Federal Reserve (the US’ central bank), with all of its quantitative easing, is losing control of its ability to keep interest rates down and that means for you, the average man on the street, things are going to get worse, not better. Let’s just look at some of the facts.
The economy is slowing down and has been kept alive on cheap money. Rising rates will put a stop to the housing recovery and the stimulus provided by people and businesses refinancing their debts into lower rates.
The jobs reports are disasters. As the media tries to spin falling unemployment numbers they leave out the fact that their decline is occurring because over 500,000 workers have left the labor force. After a certain point you’re no longer considered unemployed, because you have been unemployed too long!
The percentage of Americans working has fallen to the levels last seen back in the 1970s (63.2%), when we still had the majority of women staying home with their children.
The percentage of American men working is at the lowest modern recorded level—69.5%.
10-year government bond rates have increased from 1.6% at the beginning of May to the current rate of 2.8%.
30-year mortgage rates have surged over 1%, making purchasing a home more expensive.
Bonds as an investment are hemorrhaging money flows and are suffering significant losses.
The only bright spot for the US is the current energy boom which has supported 2.1 million jobs and contributed $283 billion to GDP. This works out to about $1,200 per household.
The Fed has spent hundreds of billions to push rates lower, but they are now back to where they were over two years ago. The Fed now has over $200 billion in losses sitting on its books from the bonds it now holds, because they have declined in value. What happens if interest rates return to where they were before the crisis? The answer is Depression 3.0.
We are really living through Depression 2.0. If it were not for food stamps there would be visible bread lines. If it were not for the billions pumping up stock and bond markets, rich people would be feeling it, but I know you’re feeling it in spite of those inflated markets. Your husband can’t find a job, your daughter still lives at home, you’re postponing having kids, mom moved in to help pay the bills, the neighbor—who you thought was doing well—just filed for bankruptcy. You get the idea. For most Americans they are moving backward, not forward as Obama claims.
This next round of the economic cycle will prevent real and meaningful growth because all extra money will have to be expended to service higher and higher interest payments. The debt does matter. The debt cannot mathematically be repaid without debasing (destroying) the value of the dollar. Everyone in the government probably knows this, just like they knew there was a housing and internet/tech bubble. Nevertheless, the vast majority of elected officials chose not to say or do anything to prevent the impending train wreck, because it is better for them politically to be wrong with everyone than right “all by yourself.” Remember, the early bird gets the worm, but the second mouse gets the cheese. Politicians will hardly ever risk their neck. Let the other guy take the fall and then claim ignorance.
So what do you do? For God’s sake, get out of any and all debts, if possible. Own your house, own your car, stash away six months—minimum—in savings. I have a good friend who had a nice $100k-a-year job who has been out of the work force for over two years. Sure, she found a new job, but the new job is part time with limited benefits and is at half of her old salary. Thankfully, she saved for a rainy day and in her case has been able to weather the storm, but not without a drastic overhaul of her lifestyle. I can list others who have lost everything.
If I had the ability to go back in time and tell them what was to come I bet each and every one of them would not have bought those extra shoes, gone on that extra long vacation or traded that car in so early.
Debts are like cancer on your spirit and body. They eat away day after day, much like simple water can bore a hole through a stone, if given enough time. So listen to me, and listen well: IT IS GOING TO GET WORSE, so please prepare accordingly. The Fed will not be able to help this time; they have run out of ammunition, and we are now on our own.