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.
Well … another glorious weekend is upon us, so let’s get this party started, shall we?
The lunatics are running the asylum. Debt has become so highly priced, locking in guaranteed losses is now seen as ‘wisdom.’ In fact, negative interest rates mean the world now values debt more than money. If you think this through, it means ‘everything is worth nothing.’
— Bill Holter
Radical monetary policy begets more radical monetary policy.
— Jim Grant
A nation without a central bank is like a cockroach without a cell phone.
— Franklin Sanders
Credits and Debits
Credit: Well … it turns out that last quarter’s GDP was far stronger than expected, with US households going on a massive spending binge. In all, consumers were responsible for 138% of the 2.1% quarterly GDP print. Last quarter, personal consumption was up 4.3% — that’s the strongest rate in five years. Hooray!
Credit: However, market analyst Sven Henrich wonders if last quarter’s spending surge was due to something else: credit card debt, which rose 8% (vs. 1.5% in Q1) to a new all-time high. He says, “With 78% of US workers living paycheck to paycheck, that’s called ‘living on the edge‘ — and warns of a coming storm.” Uh huh. By the way … now you know why Sven never gets invited to any neighborhood parties.
Debit: Then again, it’s not just US consumers who are saddled with record debt. The federal government is drowning in red ink too — which is why this week the US Congress suspended the debt ceiling until August 2021. Congress also lifted spending caps that would otherwise have put a yoke on its relentlessly-expanding federal agency and military budgets. Yes, yes …. we’ve all seen this movie many times before:
Credit: As MN Gordon noted this week, America’s politicians suspended the debt ceiling so “the descent to hell can be made as comfortable as possible. When the next recession arrives, and Washington counters it with massive new applications of debt based stimulus, the debt will go vertical.” True. But with our fraudulent debt-based monetary system, ever-expanding deficits are baked into the cake; a feature, not a bug.
Debit: Frankly, many people argue that American debt is going vertical now, with the latest US plans to borrow $800 billion in just the final six months of the current fiscal year alone. No, really. Talk about a smelly dome of debt! Come to think of it, I remember another smelly mountain from long ago — but unlike the loathsome pile being created in Washington, this one actually benefited society:
Debit: Fortunately, the cost of servicing that growing debt load got a little bit cheaper this week when the Fed kicked off its journey to negative rates with a 0.25% cut. Of course, the real reason for the Fed’s first cut in 11 years was because Wall St. all but promised a stock market meltdown without one. Alas, this is what monetary policy looks like when the inmates run the asylum. And it will all end in tears.
Credit: In the meantime, stocks continue to hover at or near all-time highs. But financial analyst Dave Kranzler observes, “The melt-up in the chip- and unicorn-company stocks is stunningly similar to the melt-up in the same chip stocks and the dot-coms in late 1999. Unicorn companies such as Tesla, Uber and Beyond Meat are this era’s dot-com stocks.” In other words: mess with the unicorn and you’ll eventually get the horn.
Credit: With stock market capitalization versus the economy as high as it’s ever been, and with the Fed having so little ammunition to fight the next economic downturn, market analyst Sven Henrich wants no part of the stock market. He wonders if blowing “a massive market bubble is the end game — (especially) with a market cap of 145% of GDP, but no history of being able to sustain that level.” Well … it sure seems so, Sven.
Debit: Meanwhile, Euro interest rates are so low that Switzerland’s largest bank, UBS, will soon be charging their clients negative interest on deposits of $2 million or more; presumably at the Swiss National Bank’s current -0.75% rate. Even worse, UBS expects the SNB rate to hit -1.0% next month. Absurd? Yes. But it begs the question: How much is our cash really worth if the banks won’t even pay us for holding it?
Debit: So when does the debt bomb finally go off? If you believe the US Treasury, sometime in 2024, every last penny of new debt issuance will be required just to service the debt. Yes, all of it. And, yes, just five years from now. Although government finance estimates tend to be wildly optimistic, which is why we’ll probably reach that dubious milestone much sooner than advertised.
Debit: Zero Hedge reminds us, once 100% of new debt issuance is required to service the debt, “every increase in rates, which will happen simply due to rising inflation expectations, will merely accelerate the Ponzi process, whereby even more debt is sold just to fund the rising interest on the debt, thereby requiring even more debt, and so on.” At that point, the “Almighty” dollar’s reign comes to an end; and if we’re lucky, so does the Fed’s.
By the Numbers
Hopefully, at some point relatively soon, the ever-growing debt figures will become so absurdly large that even the world’s central bankers will finally be forced to admit that our current fraudulent debt-based monetary system has reached the end of the road:
$244,000,000,000,000 Approximate total global debt at the end of 2018.
$22,555,807,375,126 The US National Debt as of Aug 2, 2019.
$67,026 Approximate amount of National Debt each American citizen is responsible for paying.
$870,000,000,000 Total US credit card debt.
$1,270,000,000,000 Total US auto loan debt.
$1,460,000,000,000 Total US student loan debt.
$13,540,000,000,000 Total US household debt.
$200,000,000,000,000 Estimated US unfunded liabilities.
Sources: Bloomberg; US Government and Federal Reserve Bank data via NBC
The Question of the Week
[poll id="279"]
Last Week’s Poll Results
Has your summer been hotter than usual this year?
- No (66%)
- Yes (24%)
- I’m not sure (10%)
More than 1800 Len Penzo dot Com readers responded to last week’s question and 2 out of 3 say the summertime heat has been pretty typical for this time of year; just 1 in 4 said it’s been hotter than usual where they live. For what it’s worth — and although I can’t confirm it — here in Southern California it seems like we’ve had a cooler-than-normal summer. Very pleasant!
Hey … If you have a question you’d like me to ask your fellow readers here, send it to me at Len@LenPenzo.com — and be sure to put “Question of the Week” in the subject line.
Useless News: Shaken, Not Stirred
A lady walked into a bar and said, “Barkeep, gimme a martooni!” So the bartender fixed her a martini.
The lady quickly downed her drink, then immediately raised her glass and said, “Barkeep, gimme another martooni!”
So the bartender fixed her another drink — and once again, the lady gulped it down and immediately asked for another.
The same exchange continued for a few more rounds. But after her fifth drink, the lady just sat at the bar, not saying anything.
Finally, after a few minutes the bartender walked over to her and asked, “Would you like another?”
The woman replied, “Barkeep, I’d have another martooni if I could … but I’ve suddenly come down with a terrible case of heartburn.”
“Okay, let’s get a few things straight,” said the bartender. “Number 1: It’s called a martini, not a martooni. Number 2: I’m a bartender, not a barkeep. And Number 3: You’re not suffering from heartburn — your boob is in the ash tray.”
(h/t: Cowpoke)
More Useless News
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(The Best of) 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
Sometimes I get the strangest email questions, like this one from Mr. Wonderful:
You got change for a hundy?
You actually have a $100 bill in your wallet? Hmm … If you’re so wonderful, then why aren’t you married?
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
“… In fact, negative interest rates mean the world now values debt more than money. If you think this through, it means everything is worth nothing.” – excerpt, Bill Holter.
That’s dissembled, IMO.
In the first place, I’m not “the world” but I’m in it (for a little while yet) and I don’t “value” debt at all. I price it.
Which brings me to the more important point: What I have (not just goods and services – life itself, for example) is “worth” everything to me. and it’s priceless.
I hate to see the insidious confusion of the concepts “worth”, “price” and “value”.
I think Holter was spot on, Dave. To put his comment in full context, he was pointing out the absurdity of our debt-based monetary system. Since negative interest rates infer that the currency is worthless, then one can also argue that “everything is worth nothing.” Yes, it’s absurd. That was his whole point.
Hi Len,
Thanks for another great cup of weekend coffee. Interest rates aren’t negative here yet, but they are almost there. I only keep enough cash in the banks to pay bills and that’s it!
Sara
Me too Sara. My bank holds just enough of my cash to cover my monthly payments. Not a single red cent more. I’m not waiting for banks to close and the ATM machines to shut down. I have enough cash on hand to keep me going for a pretty long time.
Thank you, Sara!
“In other words: mess with the unicorn and you’ll eventually get the horn.”
Whenever I was acting up or getting squirrelly my dad used to get that look in his eye and say “If you mess with the bull, be prepared for the horns”. That usually put me in my place. LOL
Ha ha! Yes, I was making a play on the original phrase about the bull, Cowpoke. I think that phrase has been around since time immemorial.
Why are so many European banks in trouble if interest rates are negative? They should be in hog heaven!
They’re not in “hog heaven” because of double entry accounting. Let me explain: Because there are two sides to the banks’ balance sheet, negative interest rates are the mirror image of positive rates. So while lower positive rates reduce the banks’ costs, negative rates incur bank costs. And the greater the negative interest rate, the higher the cost imposed!
Clear as mud, right?
🙂Lets have a quick review interest rates, shall we? In a world with interest rates near zero, this means banks are borrowing at 0%. But they are charging 4% for mortgages, 7% for auto loans and 28% interest on credit cards. It’s all a scam, and yet nobody is hanging from lamp posts.
Yet.
😉America doesn’t have neg rates yet but we’ve been losing money to inflation since 2009. Our savings are being decimated but most people with savings accounts have no clue that they’re actually LOSING money due to inflation.
True, Dave. With inflation conservatively running at 7% and the banks paying 1% on savings, the real return on savings is negative 6% — and even a bit less after you pay the tax on that interest!
The Fed is trapped. If they raise rates the system will implode. If they lower rates they buy a little time, but it all implodes later.
That about sums it up, WA.
Question…if the stock market is an overpriced bubble and interest rates are headed negative where should we invest ??
Good question, Mik. At this stage of the game, many people believe the return of your investment is more important than the return on your investment. Obviously, I’m one of them! There are at least two physical assets (not paper) out there I can think of that will safely supplement a diversified portfolio with no counterparty risk whatsoever.
Hint: https://lenpenzo.com/blog/id22332-economic-collapse-101-the-most-important-insurance-we-never-buy-2.html
Um, 2.1% GDP is nothing to write home about.
That’s for sure. Before the Great Financial Crisis of 2008, anything less than 3.0% was considered below-par economic performance.
Cashed out all my accounts and filled my garage with cartons of Marlboro Reds, Philharmonics, shotgun shells, vodka, and caffeine pills. Im planning on a bright future as a Neighborhood Warlord once this bubble pops.
It’s a great plan for a Mad Max world, HG, but I think you’re going to be disappointed! (I assume you are being facetious, but in case you’re not, let me explain for others who may feel the same way you do.)
Monetary resets have happened numerous times in history without society collapsing.
I think this resolves itself in one of two ways:
1. The powers-that-be convene an international monetary conference — like Bretton Woods in 1944 — where the rules are set regarding the establishment of new global monetary system. Doing this before the next crisis gets here will result in an orderly, but still financially-painful transition where the typical American (especially) will be faced with at least a temporary lower living standard than they’re used to.
2. The world continues on auto-pilot until a severe currency crisis hits that results in a breakdown of global credit. This will shutter the banks and freeze all credit vehicles. This will also admittedly be a bit more chaotic, resulting in temporary broken supply chains and shortages of select items until the world is forced to restore order by hastily convening the conference I spoke of above.
I could be wrong, of course — although history suggests I won’t be — but that is why we prep. At a minimum, everyone should have at least three months of food, water and other everyday living stores on hand to ride out temporary disruptions. Just in case.
Len,
For years you’ve been all doom and gloom. The more negative you get the higher the stock market goes. I don’t see a turn around happening until you finally give in and go Full-Monty “the economy is great!”, then and only then will the next great depression hit. For goodness sake, keep negative and stay in the bunker!
Guilty as charged, Frank. That doesn’t change the fact that the economy is only being sustained by outright monetary fraud.
As long as the Fed can continue papering over the rot within the system, then the game will continue — but I promise you we’re closer to the end of this charade than the beginning. The scary thing is, when the game ends, it will end abruptly and there will be no recovery for those who failed to protect themselves with a little wealth insurance.
My mission here is to make sure as many people as possible are aware of the rot so they have the opportunity to protect themselves, assuming they choose to do so.
Just funning with you. Many speculate on how to deal with bad times, but it might be revealing to study what actually happened during past events. Who did well and why? Found any good literature on the subject? Certainly low/no debt helps as well as other advice you give out. I heard a NPR story sometime back about reactions to hyper inflation in S America – folks bought material goods so as to have something to show for their money an use/trade (roofing sheets, cinder blocks….). My association will nix my creating a Home Depot in my back yard so that won’t work for me. : )
The only thing we cannot do without is food, so I suspect farmers will be the ultimate survivors. Let’s hope they like our shiny gold coins…….