It’s time to sit back, relax and enjoy a little joe …
Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.
It’s an abbreviated espresso edition this week, so let’s get right to it, shall we?
“After this, there is no turning back. You take the blue pill — the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill — you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I’m offering is the truth. Nothing more.”
— Morpheus in The Matrix
Credits and Debits
Debit: Dick Cheney is famous for claiming that “deficits don’t matter.” However, it appears as if a storm is gathering in the US Treasury market that suggests the now generally-accepted claim may not be true after all. Imagine that.
Credit: The brewing storm is courtesy of “Hurricane Fed,” which on Wednesday raised short-term interest rates for the third time this year, increasing its benchmark federal funds rate, setting a range of 2% to 2.25% and signaling yet another rate hike in December.
Debit: Needless to say, the Fed’s actions have affected 30-year fixed-rate mortgages, which are at their highest level in seven years. For the week, 30-year mortgage rates averaged 4.72% — that’s up from 4.65% the week before and the highest level since April 2011. The bad news for the housing market is that if rates are increasing faster than wages, then something has to give — and that something is prices, folks.
Credit: With that in mind, nobody should be surprised that, after three years of soaring home prices, the US housing market appears to be slowing down. In fact, home sellers are now slashing prices at the fastest rate in eight years — and more than 25% of the homes listed for sale last month dropped their sales price. Uh huh. Something tells me there’s an army of home flippers out there who will soon become unwitting landlords.
Debit: Of course, rising interest rates aren’t just a problem for the housing market — they’re also a problem for the Fed because, as the US government continues to expand its ever-increasing deficits, rising interest rates affect the associated borrowing costs. It’s not a coincidence that the US will soon be spending more on interest to service the $21 trillion National Debt than the military.
Debit: In case you’re wondering, one reason why central banks increase interest rates is to encourage international demand for their currency. Unfortunately, America’s use of the current dollar-based international monetary system has had the opposite effect.
Credit: JP Morgan strategist Marko Kolanovic agrees: “The current US administration policies of trade wars and sanctions that are increasingly affecting both friends and foes is the biggest risk of bringing major powers of China, Europe and Russia closer, into an alliance which could profoundly impact the USD-centric financial system.” Is this guy crazy? Or is he crazy like a fox?
Debit: Perhaps that JPM strategist is crazy like a fox, because on Monday, the European Union said that it would establish a special payment channel to allow European and other companies to legally continue financial transactions with Iran while avoiding exposure to US sanctions. Yes, that European Union.
Credit: And although the EU’s proposed special payment system is currently only being established to handle trade with Iran, there are also reports that the same system would likely be open to Russia and China as well. If true, it suggests that the system will also allow the entire global economy to trade with each other, fully independent of America’s SWIFT system. Uh oh.
Credit: Despite the clear and present danger to the dollar’s reserve currency status, few seem to be paying attention, with all three major stock indices near record highs. In fact, the Dow and Nasdaq ended the third quarter of 2018 with gains of 9% and 7%, respectively, and the S&P 500 finished 7% higher — its strongest quarter in five years. That’s great news, but it also suggests that most investors are continuing to pop the blue pills in their medicine cabinet.
The Question of the Week
[poll id="234"]
Last Week’s Poll Results
How old is your primary car?
- 1 to 5 years old (35%)
- 6 to 10 years old (32%)
- More than 10 years old (28%)
- Less than 1 year (5%)
More than 1600 Len Penzo dot Com readers responded to this week’s poll and it turns out that 2 in 3 readers’ primary car is between one and ten years old, as is mine, which is currently five years old. And by diligently focusing on a regimen of regular maintenance, I intend to drive it for another ten years. Fingers crossed!
(The Best of) By the Numbers
According to Pew, middle class households in America are those that earn between 66% and 200% of the median U.S. annual household income. Here are a few more facts about the US Middle Class:
$24,000 The current lower bound of “middle class” for a single person.
$73,000 The current upper bound of “middle class” for a single person.
$126,000 The current upper bound of “middle class” for a family of three.
61% Share of all middle income adults in 1971; the share has declined every year since.
50% Share of all adults who qualify as “middle class.”
88% Share of adults attaining a bachelor’s degree who qualify as “middle class” or higher.
83% Share of adults in 1971 attaining only a high school education who qualify as “middle class” or higher.
64% Share of adults today attaining only a high school education who qualify as “middle class” or higher.
Source: NPR
Useless News: Close Shave
An old cowboy walked into a barbershop in Red Lodge, Montana for a shave and a haircut. He told the barber he couldn’t get all his whiskers off because his cheeks were wrinkled from age.
So the barber got a little wooden ball from a cup on the shelf and told the old cowboy to put it inside his cheek to spread out the skin.
When the barber finished shaving the cowboy, the old cowboy told the barber that was the cleanest shave he’d had in years, but he wanted to know what would have happened if he had accidentally swallowed the little ball.
The barber replied, “I would have had you bring it back in a couple of days just like everyone else does.”
(h/t: RD Blakeslee)
Other Useless News
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Letters, I Get Letters
Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com
After reading my article explaining why we’ve got nobody to blame but ourselves for tip inflation, Rob left this comment:
“We need to stop calling it a ‘tip’ and start calling it what it is … ‘missing wage compensation.'”
I’ll drink to that, Rob.
I’m Len Penzo and I approved this message.
Photo Credit:Teresa Whitaker
Len, as always, an interesting and informative column to go w/my coffee! However, I DID have to look up “SWIFT system”. ;o)
Thanks, Lauren! I should have spelled out the SWIFT acronym (Society for Worldwide Interbank Financial Telecommunication).
Hi Len,
I never thought I’d see mortgage rates at 5% again but it looks like they will be here soon. How high do you think they will they go before they start coming down again?
Sara
Hard to say, Sarah. I’m not going to take a guess either!
Maybe one of the regulars here would like to hazard a guess.
In most places prices have recovered from the last bubble even though if you look at a chart of new home sales, they never even got close to the annual sales rate that was reached during the last run up.
I think that’s because we never left the recession. Take out the mandated health care spending and see how the GDP numbers look then.
Absolutely correct, Dan. I think the current level of new home sales is only about half what it was before the last housing bubble popped.
Falling housing prices … I say BRING IT ON!
Anyone who has purchased a house since 2008 is a moron. The market was never allowed to crash. Those looking to buy now should wait until it does and then buy two or three for what you can get one today.
That’s what I’m going to use my gold and silver for! Trade it in for dirt cheap real estate property then retire on the rental income I earn.
I bought a house in 2009 and got a $8000 tax credit from Obama. I didn’t think it was very stupid at the time and my home has risen in value about 30% since then.
The Fed, under Chairman Jerome Powell, is determined to return the fiat money supply to some measure of reality, which puts pressure on prices, of course.
He has made it clear that stock price changes will not affect the Feds determination, but has expressed possible concern about housing prices.
https://wolfstreet.com/2018/09/26/fomc-jerome-powell-press-conference-rate-hikes-still-accommodative/
We’ll see, Dave. There is certainly a growing chorus of academics and others in the financial community calling for the Fed to jump in and actually buy stocks during the next downturn. I’m betting they will too in a final act to “save” the system (which, by the way, died in 2008).
I wonder what the stock markets would look like without the plunge protection team and central bank money printing.
Yes, all of that provides the liquidity for stock buybacks, which prop up the market. Its one Grand scam!
Peter, I suspect it would be significantly lower. Probably by more than half.
Perfectly agreed. Now what gose down also gose up
Yep … it is a two way street.
Bring on the rate rises! I’m looking to move money out of equities and lock them in CDs or money markets for 4% yield. no risk.
Once CDs start to return 5-6% yield in the next couple years, lookout for all those baby boomers pulling money out of the stock market.