I think people who are close to me think I’m doom and gloom these days. Far from it!!
That being said, I’ve seen things the last few months that have troubled me. Regarding my background, I do have an MBA but focused more on managing people and widgets more than finance, but I did have a lot of those fun economics and finance classes. Meaning, I can read some charts and understand company health with ratios at a glance.
But big picture is what is getting me these days.
Our economy is like a breathing lung. It expands, then contracts. Over and over. During my lifetime in 44 years on this planet, I’ve been alive during some recessions and the “great recession”. My grandmother turns 93 in a few months, and she was around during the Great Depression. I recently lost my grandparents, but learned a lot about how they lived then.
Let me give you an example…
You create a lemonade stand on your block and borrow $100 to start it up at 10% interest. You charge $5 per glass. Others see you are printing money hand over fist and set up across the street from you. Your block can spend $100 per week on lemonade. That’s 20 glasses. You WERE selling all 20 glasses, but now with competition, you are only selling 10. 2 more shops setup, and you’re selling 5 per week. People who started after you borrowed money at 20%. You had pocketed money and decide to expand to city blocks all in the region. Other shops setup. But you have a process and a secret ingredient. Other shops borrowed money at 20% as well. Over time, less and less companies can afford to go into business because the higher interest rate makes entering the market harder. The market is now saturated with lemonade stands, and those with the healthiest profit margins and business models survive. You can now start charging $4 per glass and have superior ingredients. Your competitors that are highly leveraged now leave the market.
This is sort of how business works – people are entering and leaving the market all the time – sometimes more competition is good, but sometimes you are lending money at low rates to a business or venture that is risky. Not good.
Our times, today, resemble those of the late 20s prior to the great depression which started with the stock market collapse of 1929. People were buying lemonade like it ws going out of style. No one told them they were only allowed to have one glass per week. You put everything on your credit card and have little discipline about your costs.
In 2009, it was a pretty good crash fueled by the housing bubble. In 2004 or so, I was able to see the problems with reduced interest rates, and how it was creating wealth out of thin air. It helped me get some more skills and insulated me from job loss.
For example. Back in those days, I had like an 8% mortgage on a townhouse and was paying like $800 per month. I’ll ballpark everything to spare you a math lesson. What happened was money got cheaper. Interest rates went down. Then, people like me said “wait, I can get a much bigger house and STILL have an $800 mortgage”. People like me then bought a house which cost twice as much, but the monthly payments were the same. Many people who already had bigger houses suddenly found their $200,000 house was worth $400,000 overnight. Many of them borrowed home equity loans on the cheap to remodel their house and put in pools.
Cheap money made the values of property go up, but monthly payments didn’t really go up.
What then happened was there was this great scheme between lenders, real estate agents, and the market to get as many people into new homes as possible. Everyone was wetting their beak along the way. Everyone. The main problem was easy money was not only given to you and me, but many other people who had terrible credit ratings and didn’t have the best track record. Many ARMs were given out, with little thought of exploding payments down the road.
The bubble popped. I lost my job. In a company of 150,000 people, 23,000 of us lost our job in one day. 6 months later, this would be repeated as 600 of us hired in February for Lockheed on a contract were shown the door in October. THEY were cool though, and gave us a month’s notice. All 600 of us. In both cases, I had been out of work for less than a week each time – because I had marketable skills.
Just 9 years earlier, I lost my job as part of the .com bubble and this had been a time of diminished tech skills where I had gone into management. I didn’t work during all of 2003. Luckily, when I lost my job that time, I had the knowledge that my house had appreciated by 50% and I cashed out $30k. I paid off debts and moved back to York with about $20k in the bank and unemployment insurance. The goal was to finish my MBA and get back into IT. I ended up rolling up my sleeves and taken a job at the level I had 5 years prior – I sucked it up, went back to the mail room and decided I was going to stay technical as long as possible and NO ONE was going to take work from me again. 6 years later, it was prophetic as I had indeed lost my job twice due to the economic downturn in less than a year, but had virtually no unemployment. In one case, I was given 3 months severance. In the other, 1 month notice.
Three times during economic downturns I had lost my job, I’m sure many of you had as well. So when economic indicators start pointing me in a danger direction, I take note. I want to squirrel as much money away as possible, sell off unused assets, buy secondhand when possible – but I also want to acquire as many skills and passive income as possible. I beg and plead with family and friends to not rest on their laurels. Get more skills. Get a higher degree. Get certifications. At some point, you may be against 10 other people for a job. Or 100. Or 1,000. What makes you stand out?
So today, I’m writing this to warn my family and friends that I see risk coming – more than I have in quite a long time. The last downturn was the housing bubble.
But why am I worried?
- Stock market poised to take a nose dive. Completely over-inflated.
Remember that whole breathing lung thing with the stock market? The same can be said for interest rates. They go up and down to control inflation.
At this point, we are having the longest upswing of the market – ever. Take a look since 2009.
This shows the stock market has increased 4x since 2009. I know – GREAT for your 401k!! Until it shits the bed in 12-18 months. What happens when economic downturns are about to happen is that people start taking their money out and hoarding cash, metals, and safer bets.
- Buffet has $128 billion in cash and is not investing. Why not?
- China is buying up tons of gold as their economy slows
- Russia has highest gold reserves in Putin’s history
2. $23 trillion in debt
As our country continues to spend like a drunken sailor, we have to increase our interest we are paying. Last I checked it was $400 billion per year in interest only. With Trump taking the White House, conservatives cheered the end of big government. Yeah. About that.
I was a moderate democrat for a lot of years. Social liberal and economic conservative. Lower taxes are good. But at the apex of bringing in money into the tax coffers, NOW is the time to start cutting federal spending. NOW is the time to reduce government programs. NOW is the time to consolidate federal agencies. NOW is the time to spin off some government services to the non-profit sector.
However, the reverse has happened. Spending has increased. I’m really concerned now that no matter who gets into office, they will continue to spend us into oblivion. Right now, if we have debt issues, we simply print more money. This, in theory, should lead to inflation. More on that below. What happens to you if you make $40,000 per year and have $500 in monthly credit card bills…then you ring up your credit card thinking you will make $50,000 next year and it turns out you make $35,000? You either – cut costs, get a new job, or worse – maybe get a higher interest credit card to consolidate debt.
Our country has a real crisis ahead in the next 12-24 months with debt accumulation. There needs to be some hard choices, and soon. If you can’t balance the budget, or better, when you have record tax incomes, how are you going to do it when the stock market slides and millions lose their jobs? You’re looking at 2-3 trillion each year in additional debt and massive tax hikes. 5-10 years of an economic shit storm, if anyone chooses to address it.
3. The mounting pension crisis
All of you people who put in your 20 and expect full pensions are about to have a rude awakening. It’s already starting to happen in places like Chicago, where they have something like 315% promised out to what is on hand. At issue was many of these things were setup to get a certain return on interest. Well, as interest rates declined and money became cheap, rates of return on investments that pension funds needed to invest in decreased. The only types of stocks that might promise an 8% return or the like are perhaps junk bonds. Legally, pension funds can’t hold these.
Many people are about to either get their pension funds significantly reduced, dissolved, or it will disappear altogether. Please look into this. When the stock market starts to make it’s eventual slide and exhale, many of these are going boom. And the recipients of these are usually the most vulnerable.
4. Inverted yield curve
This always happens prior to every recession. Many people have made a lot to do about it recently. It’s no secret that in our country, there are some factions that root for a recession in order to undermine our president. The economy here is booming. Or so it looks. Many of us hear on the TV daily about record stock market numbers. However, the inverted yield curve is something that has caught the headlines recently. This isn’t stuff I ever covered in grad school, and you can read more about it here.
It doesn’t FORCE us into a recession, it’s just happened every time prior to one. Correlation is NOT causation. But it’s one of the indicators people like Buffet might be looking at prior to sinking $128 billion into stocks.
5. Fed interest rates
All other economies around the world started a recession 6-12 months ago. We have not. If you look at the chart below at source:
You see how interest rates were to be moving upward. This was to reduce inflation and tighten the money supply. The idea is the lung breathing thing.
2009 happened and they had to make the rate 0 in order to keep lending moving along. In 2016, it was time to start pumping the brakes a little. You gently increase interest rates over time, and this makes money harder to get. Healthier companies survive and weaker companies fold. You run into some unemployment. But interest rates going up also help prevent hyper inflation.
For example, remember what I said about my $61,000 townhouse that I sold 2 years later for $95,000? In 2008, it sold for $150,000. Then, deflation happened – or a correction to inflated assets. You bought a $150,000 house, but with interest rates back up, it no longer costs $800 per month to live there. So no one will pay $150,000 for it at 8% interest rates. The market slows. If that person needs to sell, they will have to eat the loss themselves. OR – if they lose their jobs, the banks will have to eat it.
That’s what happened in 2008/2009 between the interest rates going up and the housing market popping. The SAME conditions are in place today.
Except instead of allowing for a correction in the market by letting interest rates go up and take our pain now, it seems our politicians pressured the fed into lowering rates again to keep our economy “breathing out”.
This is AWESOME if you can lower costs at this time and reduce deficits. But that didn’t happen.
Not at all.
What will happen is that interest rates will have to go back up soon, and perhaps rapidly to keep the housing market bubble from expanding further.
So that house I used to own that was $150,000 in 2008? Interest rates now support that price. And in a year or two, that place may sell for $200,000 without the interest rates going up. Remember, this is creating fake wealth that someone is going to eat.
This might be the most concerning.
If you look at gold and silver prices historically, as the market goes down, people sell their stocks in order to preserve their wealth and put it into precious metals as a “hedge” against inflation. I’m starting to see gold go up and silver is lagging a little. The problem is the interest rate lowered, and is on a downward trend – which FUELS THE BUBBLE. It appears a lot of people want to ride this out until the pop, and then move to metals. I am moving to metals now prior to the pop to get in on the ground floor.
I see $1800-$2000 gold prices and $28-$35 silver prices within 12-24 months. This is looking between a 57-64 gold to silver ratio. Today, it’s at 84:1, and a few weeks ago when I started writing about this, it was 89:1. So, the ratio is starting to trend towards tightening as both are making a move upwards as the DJIA is down over 100 today.
2020 could be a great year for stocks. But with all of the uncertainty and the 2020 election, if a democrat wins – you’re looking at higher taxes and more regulation. Pop goes the market. If a republican wins, they will have to consider steep spending cuts and higher interest rates – which also will make the market go pop.
So – you might be good for 6-10 months. But right now I’d consider an exit strategy for stocks. And – paper money might not be good if there’s significant inflation this year.
6. Fed backing repo market
George Gammon discusses the repo market a lot better than I can. Of interest, the fed is printing money at an astronomical rate at the moment because banks are no longer lending to each other due to risks. Scary shit. I remember reading about this during my finance classes, but we didn’t dive deep into this. He also discusses a lot about quantitative easing – this is part of what is keeping us from sliding into recession like Australia, Japan, and China – and a lot of other world markets.
Watch this…and then realize there may be some trouble ahead. Gammon has a lot of doom and gloom, but he gives you the big picture with white boards pretty good.
He seems to think there may be a problem with liquidity next week. I will be watching closely.
I’ve seen a bunch of his videos and he seems to know his shit. One big problem he pointed out in one video was not that the dollar is about to collapse due to our financial system breaking – that it broke in 2008 and it’s about to circle the drain.
I recently read that more $100 bills exist than $1 bills. Think about that. We are printing money as fast as we can.
7. Global conflict
Throughout history, there’s always a dumpster fire somewhere. Today, the United States has plenty of enemies and frenemies. We are openly hostile towards a number of groups and entities – including Iran, North Korea, (insert terror group name here). We have some rivalries with Russia and China. We are trying to re-negotiate deals with our allies, causing some hostilities.
The amount of conflict isn’t new. What is new, is how people will fight us. No one is invading us. We have 300+ million guns. Not possible. What they can do is significantly weaken us. How?
- cyber attacks on power grids and banking industries
- promote disinformation in our voting and political systems. Weaken confidence in the United States institutions. You see this with the dossier which fomented hate towards our president and triggered deep state actions. You see this with Russia creating fake news sites that ill informed republicans shared.
- Devalue our currency – if they are buying our gold with our dollars, and they go off of the dollar, we are stuck holding pieces of paper and they will have our gold. If countries start flooding our country with our printed money, suddenly hyper inflation hits. Venezuela.
What mostly concerns me is something like Austria 100 years ago. Global conflict was on the rise, and a geopolitical event led to a world war. The big difference today is how to fight a world war. As I mentioned, no one is invading us. What they can do is bankrupt us.
We defeated Russia in the cold war by outspending them. But we didn’t stop. Their economy collapsed for over a decade.
What concerns me are things like Hong Kong, the South China Sea, and the trade wars.
I feel that our best way out is:
- Re-negotiate everything. We had been set up as the world’s piggy bank for the last 60 years. By re-negotiating all of these trade deals we reduce the amount of jobs lost overseas and the amount of wealth leaving our country.
- Drawing back our military. Once we have these treaties in place, we may be able to draw back forces. Maybe if we strike a real deal with N Korea, we can remove 25,000 troops from there? Maybe we can ensure other countries contribute to NATO and the UN and we can draw back these costs? Perhaps this helps us reduce our budget. Trade deals may bring more wealth and tax revenue in while our military budget is reduced.
- Increasing our interest rates. By doing this, 1 in 10 people you know are going to lose their jobs. However, if this isn’t addressed soon, it could be 3 in 10 or 4 in 10 by 2024 if not corrected soon.
- People need to get healthier. The problem isn’t health insurance companies are evil. It’s that people are getting sicker and sicker, driving up the costs of medicine for all. If 1 in 3 people today are getting cancer, who is paying for that? The other 2. These treatments are expensive, and the best means of treating diseases like cancer, heart disease, stroke, and diabetes is through a healthy diet and being in good shape. This might help us save hundreds of billions a year in medicare/Medicaid.
- Learning additional skills. With AI coming and automation around the corner for a lot of jobs, we all need to be open to other skills and side hustles. Diversify investments. This next economic recession could be the great depression of the 21st century.
- Balanced budget amendments to the constitution. I know this has been a good talking point for 20+ years, but I feel those who we elect have a budget and it should be illegal to spend more than the budget allows. Maybe a provision exists for national disasters, but other than that, our elected officials need to cut costs in order to not bankrupt us.