John Oliver on Last Week Tonight had an absolutely incredible segment on retirement plans. Most of the available professionals and products out there to "help" you save for retirement are absolute scams and this funny and informative video pulls back the mask on the financial services industry. Enjoy
After the US added about 200k jobs for many months the last few months have been weaker and May was MUCH weaker at only 38k. Many are writing this off as a one off event and we will quickly recover back to the strong job growth we have become used to in the so called recovery. One chart is pouring a lot of cold water on that and I wanted to share it with my readers.
As it turns out the jobs number is extremely correlated to loan delinquencies and has been for about 30 years. If jobs catches down to where the delinquency rate currently stands (the moving average) we would be shedding a lot of jobs. The Federal Reserve calculates 100k jobs per month as roughly break-even with population growth and since they consider us at "full employment" now, what will signify trouble for the economy and markets is consistent sub 100k jobs prints. If this 30 year correlation holds, we are about to see a dramatic fall in jobs numbers and a recession.
Considering that US corporations are in an earnings recession with earnings taking a beating over the last year while they have gone on an absolute debt binge much like the US consumer did before the housing crisis, of course they are cutting jobs. The chart below shows the unsustainable bubble in corporate debt thanks to zero interest rates. It is also important to note that much of that money has not gone to productive investment into the future but into short term, myopic financial engineering where companies are buying back shares at extremely high valuations. The corporation in 2016 is the US consumer of 2007 and this may end similarly. As the jobs number falls, corporate defaults will rise. I will keep a close eye on the jobs numbers going forward and provide updates. If the jobs numbers do follow delinquencies, it spells big trouble for the markets.
I have not written about this in a while so I wanted to update what was going on in the auto bubble. For previous articles I have written check out this and this and my original article here.
Well my last article was in January and back then (a whole 5 months ago) the average payment was $488 and that is now $500. The average price financed was $28k and that is now $30k. So the bubble has grown larger which will result in more damage after it bursts.
One of the major problems is that the more people extend their loans out longer, the more underwater they become. People used to pay cash for cars, then they started financing them for a year...then 2..then 3..then 4..then 5..then 6..then 7..you get the point. Well the problem is along the way your underlying "asset" (the car) is worth less than the loan amount. If you caught back up and paid the car off no big deal right. The issue is that most Americans are not doing that, they are trading in the car they owe say $5k more than it is worth when they buy a new $30k car they will finance for 7 years. So the $30k car turns into a $35k loan stretched over 7 years which will go deeply underwater instantly and will only get worse before it gets better. Below is a chart showing how ugly this problem is. The numbers are striking with over 31% of loans underwater. Banks are giving 120% loan to value auto loans to people with shabby credit. This is the housing bubble all over again as I have pointed out before. Now it is a much smaller piece of the economy so when the auto bubble bursts it will not take down the entire economy the way housing did, but it will be a big deal, make no mistake.
Subprime auto debt is just shy of three times as much as it was back on the eve of the financial crisis. So instead of learning their lesson about giving people who cannot pay them back money when tough times hit, the banks tripled down on the practice of throwing leveraged money at poor credit risks. Just like in housing we are giving people no money down extended loans on shaky assets.
If you are like most Americans, your current vehicle is a lease, or you at least know a person or two who has leased their car. The truth is there are great deals on leases and they have grabbed a large market share. This will create challenges when millions of leased vehicles hit the market as used cars. The chart below illustrates the coming supple deluge that will naturally lower prices for used vehicles (higher supply). So lets walk through this mental exercise.
People keep trading in a vehicle and buying a new one and they keep rolling what they owe on the last vehicle into the new loan. This creates loan to value ratios well above 100%. Well if the value of used vehicles falls (it will) their ability to buy that new vehicle (they keep getting more expensive) will be that much harder. The example of still owing $5k and rolling it into the $30k purchase will be more like owing $7k on their $32k purchase soon. Now are Americans wages rising or costs falling to free up this extra money? Of course not. In fact most large costs like housing and healthcare are soaring while wages are barely rising for most Americans. So we have a consumer doing no better or possible worse needing to pay much more per month every time they trade in their current vehicle for a new one. Either the banks throw out all remaining sense of risk management and give out 10 year loans and extend loans at 130% loan to value or this game will end soon.
We know that subprime means "shit" from the movie The Big Short and it is a precise definition. Subprime borrowers are usually not subprime because they have a great steady income. These borrowers are at risk in a big way if the labor market shows weakness or if the US economy enters a recession. Well the labor market is showing dramatic weakness all of a sudden with only 38k new hires last month after we had been experiencing about 200k for a long stretch. Add to that over 600k people gave up looking for a job in the same month and you see a potential for a big labor problem. If a lot of Americans lose jobs in the coming recession what will that do to the ability of subprime borrowers to pay that $500 per month on their $30k car? Then end is near for the auto bubble. The good news is if you still have a job and prefer to get a great deal on a used car, you will have your pick of a lot of cheap used cars soon.
Advice: Do not buy a brand new car. Do not by a brand new used car. Buy a car that is at least 3 years old and buy it with a big down payment or cash. Do not enter this cycle of doom of trade ins that bring about a more leveraged loan with higher payments every time you buy a new car. The average car payment is now $500 as we witnessed. If you skipped the new car and bought a used vehicle with enough down to keep your payment at $200 what could that extra $300 do for you? Well if you kept this habit up over the next 30 years and invested $300 saved on vehicles at a return of 8% ( stocks have historically returned 8%) after 30 years you would have $447k. I do not know about you, but I could use that kind of money 30 years from now just from avoiding keeping up with the neighbors and avoiding the trap of huge car payments.
I found this chart to be pretty astounding as well as depressing. The median net worth figures point to a rather bleak future. Put this information into the context of the average American attempting to retire in their sixties. Clearly these figures point to millions of people not having enough money to live on. If you do not want to work until you die or eat cat food in retirement...step up your net worth game now.
The Federal Reserve's policies have absolutely ruined savers, This includes pension funds, money markets, investors, the elder generation, and every single person with a savings account looking for a better future.
To clarify with an example: If you had saved $5,000 per year every year over the past 40 years (your entire working life let's say) and you put that money into a CD at current rates...how much would you get in return? Enough to buy a coffee from Starbucks each day. That is it...
This is a complete breakdown in the function of money and credit and time preference in our economy and it is all due to unnatural intervention by the Federal Reserve. Their dictatorial control of interest rates for ever man, woman, and child in the economy is leading us to disaster.
This is why if you inspect the jobs numbers, workers aged 55 and up are reentering the job market in record numbers. They cannot make any money on their savings and of course if you are 60 you cannot risk piling your life's savings into the stock market at sky high valuations just begging for a 30-60% fall.
It was not supposed to be this way. Sadly this will just get worse as interest rates will continue to fall until they are in negative territory, further destroying savings and capital investment and leading to further slowing growth and productivity.
READ IT HERE
An outstanding piece from one of my heroes, the great Jim Grant. Please give this one a read. I picked up the magazine to frame it along with some of my other favorite covers marking important moments in financial history that I can teach my kids about one day. Enjoy
I just wanted to share a sobering statistic today. In 1977, the total indebtedness of US government, corporate, and household borrowers was $323 billion. Today that total is over $45 trillion....with a "T"
Eventually this will end in tears due simply to mathematical reality. Eventually the cost to carry the debt (debt service payments) are so large that they require a default on the debt.
Next year, the US national debt will hit $20 trillion. As it stands today, we are 2 years away from entitlements, defense, and interest payments on the national debt taking up the entire income of the US government (tax receipts).
If the CBO's rosy economic forecasts are correct we are 7 years away from only entitlements and interest payments taking up the entire US budget. So we will borrow every dollar that is spent on everything but interest and entitlements. So the trillion dollar national security state will be entirely debt financed as will every singly discretionary item such as piddly stuff like education, the IRS, park services, housing and urban development, the dept of energy, dept of transportation, etc etc.
That terrifying scenario takes into account no economic recessions and economic growth higher than today. So in reality, this dire picture will happen in far less than 7 years.
If we have below trend growth and a recession or two in the next 10 years, we are looking at nearly the entire US budget being taken up by interest payments on the national debt. Imagine your entire salary going to paying minimum payments on your credit cards. It is game over at that point because nobody will loan you any more money and you cannot pay for any of the stuff you want or NEED. Politicians today spread fear about cutting the military but the reality is that the government will not be able to afford one tenth of the current military in a decade unless this debt problem is addressed. Joint Chiefs of Staff Chairman Admiral Mullen was correct when he said the national debt was the greatest threat to US national security, but nobody listened to him.
Sadly it is not just the government debt that is in this position. The debts of US corporations and the American people are similarly over-leveraged. You may be able to identify with your own personal finances and if not you certainly know a few people who are up to their eyes in debt. Corporations are foolishly borrowing money in order to buy their own stocks to boost the share price to enrich their own executives. At the same time Americans run up debt not on their small business or investment property but on bar tabs, meals out, igadgets, and trendy clothes.
The entire economy is built on a massive debt sand castle but eventually the tide will come in. Be different and be prepared for this by being one of the few who is debt free and has savings and investments. Be ready to take advantage of the opportunities this once in a century reset brings.
"Only when the tide goes out do you discover who's been swimming naked." - Warren Buffet
“Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.”
-Ludwig von Mises
Just wanted to put down some ramblings on where we are right now in the economic picture and what I think is to come.
We had a nice up week in the markets and oil has been doing better lately. That is about to change I think. I expect oil to retest its lows soon and I expect stocks to retest the 1812 levels on the S&P pretty soon as well. I think both were just in bear market rallies and will hit their next leg down pretty soon. There was a big short squeeze in stocks and oil rallied on the hopes of a production cut that never happened.
If stocks break that 1812 level convincingly and close below it there will be a dirty leg down that will not find support for a while. Eventually stocks will go low enough to scare the Fed into action, we are just not sure where that level is.
With that in mind I want to talk about what the Fed will do in the next few years to try and fight the economic and market collapse. Obviously rates are already near zero so interest rates will be pushed negative to try and stimulate growth. In order to get any actual effect from negative rates the Fed and the government and financial authorities will be forced to place restrictions on cash if not move to ban it. See my other site thewaroncash.com for a lot more on that subject. The Fed will print money again with more QE although this time perhaps to fund direct payments to We the People or to fund HUGE fiscal stimulus that Congress will enact to spend money on infrastructure projects and perhaps military spending. Printing money and just buying bonds with it clearly did not work and the Fed has to know that. Eventually the answer will be what people refer to as "helicopter money" which is direct payments of newly printed money to the people or to Congress to spend on "stimulus."
None of that will actually work, BUT, it will appear to work for a time, just like the last rate cuts and money printing did until they recently removed the punch bowl and it all fell apart.
One day interventions by the Fed and other central banks globally will simply stop working and that is where the ultimate collapse end game will occur where real price discovery will take place and massive liquidations and bankruptcies and depression will strike. It will be a dark time but it is quite necessary to clear the economy of the massive imbalances that have been built up with the huge and insane credit expansion of the world's central banks over the past 20-40 years. These policies of stimulating the economy with interest rate cuts and money printing and stimulus work until there is so much debt that nobody wants anymore credit and people cannot afford another dollar of credit because it is hard enough to pay off what they have. This is called Peak Debt and we are either there or only a couple steps away and that is why soon the control of the central banks to boost asset prices with these tools will be lost and they will either have to let the system reset with massive losses and restructuring and a depression like environment...or they will need to implement truly Orwellian policies that Western Civilization typically shuns.
The good news is that China is worse off than the US, although their collapse will certainly take the rest of the world with it. The debt levels in China and in particular the bad debt levels that will never be repaid are absolutely staggering, China has trillions and trillions of dollars in bad loans that will slam the Chinese banking system and the Chinese will absolutely be forced to devalue the Yuan in a big way and pretty soon. China is in for a really tough time in the next couple of years and they may be the first domino to fall in what promises to be a rough time globally with debt levels and financial risk so high. There is a lot of dry brush waiting for a spark.
With that said bitcoin and gold have rallied pretty hard lately and my Argentina suggestion is up 5% lately so there is some good news and there will always be good investments out there. Right now I think holding a lot of wealth in cash, gold and silver, and bitcoin makes a lot of sense. I am looking to start buying oil companies soon but I am waiting for new lows to be made before I start chipping away.