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.
There’s a lot to cover this week, so let’s get right to it …
“A drop in the ocean has no fear of a hurricane.”
–Aleksandr Solzhenitsyn
“When you’re in the eye of the storm, you are often not aware of the whiplash around you.”
— Hugh Bonneville
Credits and Debits
Debit: The destruction wrought by Hurricane Michael has been grabbing all of the headlines lately, but one should never forget that it’s Fed interest rate policies and the US government Plunge Protection Team that’s responsible for demolishing the free market’s price discovery mechanism. That may sound like hyperbole, but it’s true.
Credit: Ultimately, there’s a very good reason investment portfolio manager Doug Kass reminded everyone last week that, “It’s not the economy. It’s interest rates, stupid.” And before you get too upset at the epithet, for the record, I’m pretty sure Doug was only talking to these people:
Credit: Why pay attention to interest rates? Well … because the most important price in economics is the price of cash, which is reflected by the interest rates we pay for various forms of credit. And one of the most highly influential interest rates is arguably the 10-year US Treasury yield, which seems to have broken out convincingly from its central-bank-orchestrated 36-year (!) downtrend. See for yourself:
click to enlarge
Debit: Then again, for his part, macroeconomist Jim Rickards believes that falling bond yields are more likely than not in the coming months. And since lower yields equate to rising prices, that would mean the long-running bull market in bonds still has a way to go before it finally kicks the bucket. Maybe. But only time will tell.
Debit: Of course, rising interest rates increase government financing costs. For example, with the average 10-year yield near 2.3%, interest on the US National Debt hit a record high of $523 billion for the 2018 fiscal year. Unfortunately, an even larger deficit is expected during the 2019 fiscal year that started on October 1st, with the yield currently near 3.2%; that’s 39% higher than last year — and growing. Ouch.
Debit: Higher interest rates are bad news for the stock market too, as evidenced by this week’s carnage on Wall Street, where the Dow, Nasdaq and S&P 500 all had their worst week since March. And although stock market investors had a bad week, I promise you, this guy’s was even worse:
Credit: Lord knows the stock market doesn’t need any headwinds — especially when you consider that three times as many companies that make up the S&P 500 are at their 52-week lows versus those that are at their 52-week highs. Oh, wait … that was before the week began. Who wants to bet the disparity is even greater now?
Debit: It’s no secret that higher interest rates aren’t kind to the housing market either. With that in mind, I see 30-year mortgage rates have topped 5.0% for the first time since February 2011. You know what that means: It won’t be long before the banksters start pushing 40-year mortgages. Well … at least the financiers whose year-end bonuses depend on growing their bank’s home loan portfolio.
Credit: It certainly doesn’t help that median home prices have increased 76% since bottoming out in early 2012, while average weekly wages have increased just 17% over the same period. With that in mind, it shouldn’t be surprising that a recent study found that most Americans would be better off renting than buying a residential property. At least for now.
Debit: Of course, it’s not a coincidence that, since the US broke the dollar’s anchor to gold in 1971, the median family home has become less affordable. In 1970, the median American family could earn enough to purchase a home in just 2.4 years of work. But by 2016, it took nearly twice the effort: 4.3 years. Behold! Yet another reason why the only proponents of fiat currency are bankers and the government.
Debit: Decoupling the dollar from gold is also why the US workforce has experienced an astounding 55% decline in real wages since 1974. By the way, if you’re curious as to where the lost purchasing power of the “Almighty Dollar” escaped to, take a trip to Washington DC and its surrounding suburbs, where even Stevie Wonder can see that the federal government is bigger and more powerful than ever.
Debit: Meanwhile, bottled water is being rationed in Zimbabwe and the people are stocking up on bread, beef, cooking oil and other necessities as fears of yet another currency crisis there mount. Compounding the problem are wary citizens who don’t believe officials who are promising that their bank savings are safe— unlike their 2008 currency crisis, when the government raided their accounts. Imagine that.
Debit: Speaking of currency crises, Venezuela’s inflation rate is now “just” 4%. Per day. And if you’re wondering how much Venezuelan consumer prices have risen since September 2017, the answer is 488,856%. That, folks, is what hyperinflation and economic collapse looks like.
Debit: Sadly, the terrible economic storm that is currently blowing over Venezuela is threatening to wash across America’s shores — and the gusts are growing stronger. For those of you living it up on the beach and thinking everything is just fine, please … pull your head out of the sand and start paying attention. Your financial well-being depends upon it.
By the Numbers
Are stocks headed into a bear market? Well … here is a look at some of the most staggering stats from Wednesday’s big sell-off:
831 The number of points the Dow lost on Wednesday; that was its worst day since Feb. 8, when it fell 1033 points.
4.1% NASDAQ’s single-day loss at the closing bell on Wednesday.
10.2% The single day loss for Tiffany, which was the S&P 500’s worst-performing stock on Wednesday.
8.5% The single day loss for Twitter, which was the S&P 500’s second-worst performing stock on Wednesday.
28% The percentage of S&P 500 stocks that ended Wednesday’s sell-off more than 20% below their 52-week highs, which officially puts them in bear market territory.
Source: CNBC
Last Week’s Poll Result
Which of these is responsible for most of your net worth?
- Stocks (53%)
- Home Equity (28%)
- Something else (19%)
- Bonds (0%)
More than 1600 people responded to last week’s question and it turns out that almost 1 in 5 Len Penzo dot Com readers attribute the bulk of their net worth to something other than home equity or their stock portfolio. For the record, five people say the majority of their net worth is due to bonds.
The Question of the Week
[poll id=”236″]
Useless News: Planting Melons
A prisoner in jail received a letter from his wife:”I’ve decided to grow some melons in the old flower bed. When is the best time to plant them?”
The prisoner, knowing that the prison guards read the outgoing mail, replied in a letter to his wife:”Whatever you do, DO NOT touch the old flower bed! That is where I hid all the gold.”
A week or so later, he received another letter from his wife:”You won’t believe what happened. Some men came with shovels to the house, and dug up the entire flower bed!”
So the prisoner wrote another letter to his wife in reply:”Great! NOW is the best time to plant the melons.”
(h/t: Carrie)
Other Useless News
Here are the top — and bottom — five states in terms of the average number of pages viewed per visit here at Len Penzo dot Com during the past 30 days:
1. Indiana (1.82 pages/visit)
2. South Dakota (1.79)
3. Minnesota (1.78)
4. Connecticut (1.69)
5. Alabama (1.67)
46. Alaska (1.21)
47. Montana (1.20)
48. New Mexico (1.18)
49. Wyoming (1.17)
50. Rhode Island (1.11)
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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 on 18 tips to consider before buying home, auto and life insurance, Sariah shared this story:
“My brother bought an expensive new car and my parents reminded him to also purchase auto insurance. But he didn’t get it and two days later he crashed his car into a tree!”
Was the car a Mercedes? If so, now your brother knows exactly how a Mercedes bends.
I’m Len Penzo and I approved this message.
Photo Credit: public domain
Len,
I really thought this was going to be the week stocks finally rolled over. Didn’t happen though! Will it EVER happen?
Sara
The central bankers of the world have worked hard to keep the markets climbing. So it only makes sense that their efforts will eventually result in the opposite. Who knows when though. It could be next week or it could take another ten years.
Frankly, I’m beginning to wonder.
Total market capitalization is much higher than the total U.S. GDP, like 140%. Bad sign. Stocks normal cap rate is 75% of GDP give or take.
I saw a video from Mike Maloney on this earlier in the week. It is an interesting data point, Sean.
Len. I enjoy your blog very much. You are speaking the truth and have a good handle on economic matters. I’m an old guy, working my way through my seventh decade. I’ve been reading stories about the collapse of industrial civilization since the 1970’s and economic collapse since before the turn of the last century. They’re interesting and there is truth in a lot of them. Still I’ve been impressed at how the powers that be keep kicking the can down the road. That’s not a value judgement. It’s just an observation.
Thank you, Greg. The Fed’s QE program convinced me that they’re going to do whatever it takes to keep the system going as long as they possibly can — regardless of the ultimate financial impacts on the people. Their greed and the spoils that result from this corrupt system are far too great to let them willingly give it up in favor of an honest money system backed by precious metals. Sad.
The Fed can paper this thing over and over and over to prevent any market panic. However, they CANNOT print physical gold and silver (a.k.a. real money). That’s where true value lies right now.
Unrealized value, yes. Silver is the cheapest asset on earth, in my opinion. As I’ve said here many times in the past, except for silver, what other commodity is selling for 80% less today than it was in 1980?
5% interest is still low compared what it was in the many years ago. People were paying double digit rates on their mortgages in the 1970’s and 1980’s
Yes, but real wages were higher back then too, so they were easier to afford.
“People were paying double digit rates on their mortgages in the 1970s and 1980s”
Higher interest rates are hard on borrowers, it’s true. But they reward savers: During the years Volcker was Fed chairman and interest rates went above 15%, our family bought U.S. Treasury bills through the Treasury Direct program and the interest on them paid for a new car, which we needed at the time.
As a teen back in the early 80s, I remember getting double-digit returns on my savings, Dave. It was awesome. It’s a shame the Fed has decided to punish savers for the past ten years — but that is just a symptom of our current monetary system sitting in ICU on life support. Until it dies, savers will have to wait to be justly compensated again.
About 1980, an ad in the newspaper (remember when they really were paper and reported news) indicated that money market funds were returning 15%. I figured it was a misprint and was delighted to find that it was not. Was great while it lasted. Alas, the the government decided that rewarding savers did not serve well the greedy top that seems to make the rules. Thanks for another great “Black Coffee” Len.
My pleasure, Steve.
Len, I’m in the camp that says interest rates will continue climbing until the stock market breaks. There’s no way the Fed is going to stop raising rates unless somthing forces them to.
Agree, Peter. But I believe the stock market will be forced to retreat before the end of next year. You can’t have interest rates and stocks both rising at the same time. At some point, stocks will capitulate.
Once stocks go into an extended tail spin, that will be the time to watch what bond yields do — those yields should fall as investors “flee to safety.” However, if they continue rising, it will be a very good sign in my opinion of a budding currency crisis.
Hi Len,
Thanks for the article. I appreciate reading these during my breaks at work.
I agree with you that we might see one more surge in the market, rising rates and rising dollar before the big pull back. Being a working adult through the recession, I was witness to panic selling which caused a huge chain reaction.
Thanks you, Don.
Hey Len – I am super confused! It seems interest rates are the cause of the market falling in the eyes of most people and yet they started rising end of 2015 so wouldn’t have been the time for the market to fall if it was the reason for the pullback? I was trying to find information on the cycles of the market like this one for example that highlights some years are worse than others (https://investormint.com/investing/will-the-stock-market-crash) and some months worse than others too but maybe that’s not relevant at all and it is interest rates – but then again why would interest rates be the culprit if they weren’t for the last few years when they were also rising? Is there a tipping point?
Jim, with respect to stock prices, the important factor is now when interest rates started rising. Rather, it is the point where interest rates become high enough to actually begin impacting the economy.