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?
We forget old stories, but those stories remain the same.
— Dejan Stojanovic, The Sun Watches the Sun
It’s like deja vu all over again.
— Yogi Berra
Credits and Debits
Debit: Did you see this? Tesla stock closed the week at $650 per share (!), further solidifying its position as the world’s biggest car maker — at least in the eyes of investors who are responsible for Tesla’s prodigious market capitalization. But if that’s true, then one of you Tesla investors out there really needs to explain this:
Debit: In other news, if you’re unemployed, but still want to enjoy all of the benefits that home ownership has to offer, you’re in luck. Why? Because it looks like the mortgage lending industry is trying to eliminate debt-to-income rules for home buyers. Yes, again; it’s the same old story. That being said, here’s a real estate anecdote I’m fairly certain most people haven’t heard before …
Debit: You know … once upon a time, banks wouldn’t give you a mortgage without 10% down — or more — and the income to afford a double-digit interest rate. The trouble is, most people today have been so conditioned by cheap credit that they think buying a home with nothing down at 3.5% is normal. And it is; well … at least until the latest Fed credit bubble finally implodes.
Credit: As asset manager Sven Henrich observes, the trouble is “interest on debt increased as did debt (itself) during times of zero rates. But just the slightest increase in rates produced an accelerated curve in interest on debt. So much debt has been accumulated that higher rates are virtually impossible to sustain the vast amounts of debt.”
Credit: Henrich then goes on to point out an obvious — and very inconvenient — fact facing all of us: “We’re trapped in an historic debt cycle that requires ever more debt for ever less incremental growth. But nobody wants to hear the truth because it’s unpopular.”
Problem is in the fanatical quest to prevent any and all recessions we keep creating ever bigger bubbles and bust cycles while never really cleaning out the excess, hence the debt burdens & obligations become an ever larger drag on future growth.
Sven Henrich (@NorthmanTrader) January 29, 2020
Debit: Unfortunately, when the Fed’s credit bubble finally pops, it won’t just put an end to overvalued and unprofitable companies like Tesla — the US dollar will almost certainly be torpedoed too, if only because the enormous mountain of debt that has been accrued since the dollar’s link to gold was broken in 1971 will finally become untenable.
Credit: Of course, it’s not just zombie companies whose shares have benefited from the Fed’s low interest rate policy. Many profitable Fortune 500 companies have also taken advantage of cheap debt to fund stock repurchases — thereby increasing earnings per share — fostering higher prices for them too. Never mind that for the last five years profits, collectively, have done this:
Debit: By the way, the extraordinary growth in stock, housing and other asset prices is proof positive that proximity to a central bank’s printing press is far more lucrative — and easy — than earning a living through productive work. Oh, yeah … that same artificially-generated asset growth is also the primary reason for the increasing disparity in income inequality.
Debit: Another major problem with cheap credit is that it ensures today’s retirees — who, in a healthy financial system, could earn a decent risk-free return from a nest egg invested solely in Treasuries — now lose money when adjusted for inflation. It’s also why people today have to set aside three times more money for retirement as their parents and grandparents did. Imagine that.
Debit: Speaking of inflation, a college degree now costs twice as much as it did 20 years ago. Perhaps that’s why a recent Morningstar study found that most folks would be better served by choosing between saving for retirement, or saving for their kids education — not both. Yes, even with a skyrocketing stock market that only seems to go up. Then again, in a world awash with ultra-cheap dollars that are being devalued daily … that’s to be expected.
By the Numbers
Forbes reported this week that Mark Zuckerberg’s net worth fell by $5 billion on Thursday after Facebook stock took a hit due to rising expenses. Even so, Zuckerberg won’t be forced to shop at Walmart any time soon, as he was among the five richest people at the end of 2019:
5 Mark Zuckerberg (Facebook co-founder; $73 billion)
4 Warren Buffett (Investor; $86 billion)
3 Bernard Arnault (Owner of LVMH; $106 billion)
2 Bill Gates (Microsoft co-founder; $107 billion)
1 Jeff Bezos (Amazon founder; $109 billion)
Source: Investopedia
The Question of the Week
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Last Week’s Poll Results
Were your parents good financial role models?
- Yes (44%)
- Yes … and no. (30%)
- No (25%)
More than 1800 Len Penzo dot Com readers responded this week’s question and it turns out that, when it came to personal finances, 5 of 9 had parents who set a dubious example at best, or a poor one at worst. It’s yet another reminder why being a parent isn’t easy.
If you have a question you’d like me to ask the 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: Monopoly
Growing up as a kid, I learned all about capitalism through the board game Monopoly. I mean, what better way to teach a young mind about how our economy functions. I loved this game as a kid — and still do! Only now, as an adult I have some questions that remain unanswered. For instance, if I have all this money and own all this real estate, then why am I still driving around in a thimble?
(h/t: Cowpoke)
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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 highlighting 36 amazing uses for plastic grocery bags, B had a suggestion of her own:
Your list should be preceded with the following: 1. Reuse it next time at a store.
Now why would I ever do that when I can use it to pick up dog poop?
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
Hi Len,
Thanks for another great cuppa joe! Bezos is still the richest person even after his divorce. He must have a great lawyer!
Have a great weekend,
Sara
Thanks, Sara. Either that or a very reasonable ex!
” … most people today have been so conditioned by cheap credit … (etc)”
I realize this blog is about finances, but the social fabric of our country encompasses more than that. Black Swan events bring people back to their senses and they once again appreciate virtue itself as they struggle to survive – the “no atheists in foxholes” syndrome.
For example, if the Hunan coronavirus becomes a pandemic, money will be pretty low down on the list of those now living in ivory towers, ensconced to be immune from the rage of the financially dispossessed.
Right now is a very interesting time – Hunan virus out of control in some places and its severity still unknown, the President surviving the attempts of the collectivist elite to overturn the 2016 election, the DJ average down 650 points Friday and silver above $18.
What next? Who knows?
Well said, Dave.
Regarding the virus itself, I’m still on the fence regarding the true danger. Based on the reported figures, the mortality rate is an order of magnitude lower than many common flu strains. Then again, the reported figures coming from China are inherently suspect, so I guess we’ll only know for certain over the fullness of time.
“The devil we know (etc.)”
Some years there are 60,000 deaths in the U.S. in a flu season, but, like traffic deaths, we’re used to it.
All you have to do is look at Tesla’s stock price ($650????) and compare it to its peers to see just how insane the stock market has become. It’s a total joke and I refuse to play in it, even though it seems like you can’t lose.
Like Len mentioned last week. We’re back to the crazy days of pets.com.
I suspect the majority of Tesla’s recent parabolic trajectory is due to a good old fashioned short squeeze; after all, I think it was one of the two or three most-shorted stocks as recently as this week.
If true, there will come a point where the squeeze burns itself out and then the return to earth will quickly follow.
Get to know your neighbors. There are rough seas ahead. Frugality and personal responsibility is going to be forced on the masses.
When the credit bubble finally pops, everyone is going to be in for a rude awakening — but those who depend on that bubble to maintain their standard of living are going to be the hardest hit.
The US is an empire in collapse. I too am worried what comes after will be far worse, assuming they don’t fix the current system before it fixes itself.
If they wait for the financial system to seize up, there will undoubtedly be broken supply chains until they perform a monetary reboot — which is why I am constantly preaching that everyone should have at least a few months of food and other essentials on hand to weather such a storm.
What I am sure won’t happen, is that society devolve into a Mad Max type of world. Monetary resets have happened many many time throughout human history and the world has carried on — sometimes with a lot of pain, but the social fabric has never completely unraveled. Eventually a new system is put in place and life resumes; if fact, if usually thrives!
So Len, serious question. If the dollar is going to take the big dirt nap, wouldn’t that suggest we go into debt and load up on as much gold and other real stuff we can get our hands on while it is still being accepted by everyone?
It’s a great plan in theory, Sal … but only if you have the timing down almost perfectly. Otherwise, that is a very reckless move. I would never attempt such a move. Ever.
Len,
Im starting to wonder if this ever increasing fiat can continue forever. I see where they have decided to extend the Repos past April, but didnt say how long. I just wonder if the citizenry has gotten so ignorant that they will accept these infusions of monetary fiat to infinity and beyond?! Tesla is the perfect example here.
Jared
No, it won’t continue forever, Jared. Next week I will focus on Alasdair Macleod’s recent piece, which explains why this can’t — and won’t — go on forever. In fact, he actually went on record as saying he believes the central banks will lose control by the end of the year. We shall see.
Interest rates need to be raised to at least 6% and maybe even 8% to flush the toilet on corrupt market manipulation.
True, DK. But we’re now at a point where doing so will also flush the toilet on the entire financial system. The only way out is a monetary reset.
Len, found your site a few weeks ago. I just want to thank you for opening my eyes. You are the only personal finance website I know of that covers the big picture. I’ll admit, it is making me think.
Thank you, Don. And that’s all I can hope for actually.