Black Coffee: Shuffling the Monetary System Deck Chairs

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.

I hope everybody had a good week. We’ve got a lot to cover, so let’s get right to it …

Easier financial conditions will promote economic growth. Lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

— Ben Bernanke (November 4, 2010)

Central bankers are like cockroaches: It’s not so much what they steal and carry off as what they fall into and foul up.

— Franklin Sanders

Credits and Debits

Debit: Did you see this? There are 480 million credit cards in circulation — that’s 1.47 per person, and 20% more than 2008. And although total US credit card debt is less than mortgage, student loan and auto debt, last quarter it outpaced them all, climbing $26 billion. In fact, US credit card debt is at an all-time high of $870 billion — with 8% of all cards 90 days past due. Does anybody else see a problem here? No? Okay … then how about here:

Debit: Speaking of debt, the US trade deficit is at its highest point since 2008. Even worse, America’s budget deficit is on pace to end the current fiscal year at more than $1.2 trillion, underscoring the revenue hit from tax cuts, increased government spending, and higher debt servicing costs. As for the budget gap, it grew by 77% last quarter, compared to the same period a year earlier. Shocking, yes. But unexpected? Uh, no.

Debit: Meanwhile, US stocks are the most overvalued ever when measured against: price to sales; price to book; enterprise value to sales; enterprise value to EBITDA; price to earnings; and enterprise value to free cash flow. Yes, even more than during the manic market peaks of 1929 and 2000. Central banks printing $15 trillion over a decade will do that. Hey … and if you think that’s something, just wait until the MMT fairy gets here!

Credit: This week Jim Grant warned that the meddling Fed “is playing with fire” by actively seeking policies designed to depreciate the dollar. “Artificially low interest rates (always) store trouble; facilitating leverage, they promote not growth, but larger balance sheets. The Fed should leave the market alone.” Agreed. But that’s like asking a scorpion not to sting.

Credit: Perhaps influenced by Mr. Grant’s warning, Lance Roberts noted that, “There’s a specific reason why financial (analysts) have a preoccupation with the (Fed’s) balance sheet. The preoccupation came to light in 2010 when Ben Bernanke added the ‘wealth effect’ as the ‘third mandate’ to the Fed.” Yes, as a result, even Stevie Wonder can now see the tight correlation between Fed monetary policy and the stock market:

Credit: Then again, as Charles Hugh Smith notes, the Fed’s infamous third mandate not only increased the already-extreme wealth gap between rich and poor, it has mainly benefited the Baby Boomers and Gen X at the expense of younger generations. Although I wouldn’t say it’s quite as extreme as this — at least not yet:

Debit: Of course, if you want to know why the stock market is now too big to fail, it’s this: Chicago’s fire, police and municipal pension plans have just 20%, 24% and 28%, respectively, of the funds required to meet future obligations. If those were private sector funds, they’d immediately be deemed insolvent — which is why if the stock market has a downturn now, it’s “game over” for most pension funds everywhere.

Credit: On a related note, Satyajit Das opined that, “Printing money was always going to be easier than withdrawing it later. In effect, central banks are boxed into a situation where they must maintain low rates and abundant liquidity, lest they destabilize the markets. This state of ‘infinite QE’ risks miscalculations and major policy errors, which means if central banks are the only game in town, then the game is lost.” Ya think?

Debit: It was just two months ago that Fed Chair Jerome Powell suggested he wasn’t worried about asset prices by promising several rate hikes in 2019. Stocks promptly tanked. Fast-forward to now: The Fed has caved in to the market by putting the brakes on monetary tightening — and may soon go in reverse! Heck, if I didn’t know any better I’d say these highly-paid bureaucrats are making things up as they go along.

Credit: Unfortunately, the Fed’s obvious kowtowing to Wall St. is a real problem because, as financial analyst Michael Lebowitz notes, there’s a real concern that, “Capital markets which are heavily dependent on the Fed, and seemingly insensitive to price and valuation, are promoting instability and gross misallocation of capital.” You’re right, Michael — but as long as stocks are going up, few people seem to care.

Debit: It’s becoming more apparent with each passing day that the world’s central bankers are playing a losing game. Indeed, the correlation between central bank liquidity injections and higher stock prices via QE and hocus pocus such as targeted long-term refinancing operations (TLTRO) may be changing, if the reaction of Euro stocks to Thursday’s ECB goosing is any indication: the market tumbled on the news. No, really.

Credit: When it comes to the Fed, Mr. Lebowitz succinctly summed up the situation this way:

In 2 months we have gone from 3 more hikes and QT being on “autopilot” to ending QT, starting up QE and negative rates… Not only is the Titanic headed for an iceberg but the captains are clueless.

Michael Lebowitz, CFA (@michaellebowitz) March 6, 2019

Debit: Actually, our debt-based international monetary system hit the iceberg back in 2008, and we’ve been taking on water ever since. Frankly, what we’re witnessing now is the beginning phases of the Titanic captain waking up to reality and making the call to abandon ship. However, the panic will begin only after the passengers realize there aren’t enough lifeboats for everyone.

By the Numbers

I know it’s hard to believe, but before the 1980s rolled around, people typically tried to avoid unnecessary debt. No, really. Now going into debt is an afterthought. With that in mind, here are the states with the five highest and lowest amounts of credit card debt:

1 Alaska (Average balance per person: $8515)

2 Connecticut ($7258)

3 Virginia ($7161)

4 New Jersey ($7151)

5 Maryland ($7043)

46 West Virginia ($5547)

47 North Dakota ($5511)

48 Mississippi ($5421)

49 Wisconsin ($5363)

50 Iowa ($5155)

Source: Michigan Watchdog

The Question of the Week

[poll id=”258″]

Last Week’s Poll Result

Which type of cars do you prefer?

• Japanese (49%)
• American (29%)
• German (15%)
• Korean (5%)
• Something else. (1%)

More than 1500 Len Penzo dot Com readers responded to last week’s question and it turns out that, almost half of them say they prefer to drive cars with a Japanese nameplate. I guess that’s not surprising considering that the six biggest-selling cars in the US last year belonged to either Toyota, Honda or Nissan.

Useless News: Playing Through

A young man, who was also an avid golfer, found himself with a few hours to spare one afternoon. So he figured that if he hurried and played very fast, he could get in nine holes before he had to head home.

Just as he was about to tee off, an old gentleman shuffled onto the tee and asked if he could accompany the young man, as he was golfing alone. Not being able to say no, the young man allowed the seasoned gentleman to join him.

To the young man’s surprise, his older playing companion moved fairly quickly; the old man didn’t hit the ball far, but he plodded along consistently and didn’t waste much time.

Finally, they reached the ninth fairway and the young man found himself with a tough shot. There was a very large pine tree about 20 feet in front of his ball and directly between him and the green.

After several minutes of debating how to hit the shot, the old man finally said, “You know, when I was your age, I’d hit the ball right over that tree!”

And so, with that challenge placed before him, the young man swung as hard as he could. The ball quickly went high in the air on a beeline toward the flagstick, only to smack into the top of the tree and thud back onto the ground not more than a foot from where the ball had originally laid.

The old man looked at the ball, and then offered one more comment to his young playing partner, “Of course, when I was your age, that pine tree was only three feet tall.”

(h/t: Tom)

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 over the past 30 days:

1. South Dakota (2.50 pages/visit)
2. District of Columbia (2.29)
3. Wisconsin (1.98)
4. South Carolina (1.96)
5. Alabama (1.89)

46. Nebraska (1.28)
47. Mississippi (1.27)
48. Alaska (1.25)
49. Vermont (1.18)
50. Wyoming (1.10)

Whether you happen to enjoy what you’re reading (like my friends in South Dakota) — or not (ahem, Wyoming …) — please don’t forget to:

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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 the reasons why you should — and should not — pay off your mortgage early, Nicky wrote this:

Nice post! I learned something new today.

They’re a rare find ’round here, Nicky… but even a blind squirrel finds an acorn once in awhile.

If you enjoyed this, please forward it to your friends and family. I’m Len Penzo and I approved this message.

Photo Credit: brendan-c