{"id":39969,"date":"2016-11-19T05:15:05","date_gmt":"2016-11-19T13:15:05","guid":{"rendered":"https:\/\/lenpenzo.com\/blog\/?p=39969"},"modified":"2016-11-21T21:59:06","modified_gmt":"2016-11-22T05:59:06","slug":"black-coffee-19-november-2016","status":"publish","type":"post","link":"https:\/\/lenpenzo.com\/blog\/id39969-black-coffee-19-november-2016.html","title":{"rendered":"Black Coffee: The Happy Thanksgiving Edition"},"content":{"rendered":"

\"black-coffee-thanksgiving\"<\/a>It’s time to sit back, relax and enjoy a little joe …<\/p>\n

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.<\/p>\n

Let’s get right to it this week …<\/p>\n

Whoever is careless with the truth in small matters cannot be trusted with important matters.<\/em><\/p><\/blockquote>\n

— Albert Einstein<\/strong><\/p>\n

Confidence is contagious. So is lack of confidence.<\/em><\/p><\/blockquote>\n

— Vince Lombardi<\/strong><\/p>\n

Credits and Debits<\/strong><\/p>\n

Debit:<\/strong><\/span> India’s decision to ban 500- and 1000-rupee notes last week has, not surprisingly, resulted in a cash shortage that is threatening to shut down their entire economy<\/a>. It also resulted in gold soaring to $2800 per ounce there — well … assuming you could find someone willing to sell it.<\/p>\n

Debit:<\/strong><\/span> Then again, when 97% of the Indian economy is cash-based, and 88% of all outstanding currency is no longer usable, a panicked populace<\/a> and supply-chain breakdowns are to be expected. At least they are to those who understand rudimentary economics.<\/p>\n

Credit:<\/strong><\/span> Meanwhile, the major stock market indices continue to hover near all-time highs. Unfortunately, considering that the S&P 500 is on track for a sixth consecutive drop<\/a> in year-over-year earnings, the odds are good that irrational exuberance has returned with a vengeance.<\/p>\n

Debit:<\/strong><\/span> One example of stocks’ absurd valuations is Caterpillar (CAT<\/a>). Despite a sky-high P\/E ratio of 53 — an average P\/E is around 15 — shares of the heavy-equipment manufacturer are up more than 35% this year. Buyers haven’t been dissuaded by the fact that Caterpillar has seen 47 consecutive months<\/a> of declining retail sales either. I know.<\/p>\n

Debit:<\/strong><\/span> Did you see this? The National debt is on pace to increase by $2.4 trillion<\/a> this year. Uh huh. If it will make you feel better, let’s call it $2400 billion. On second thought, never mind.<\/p>\n

Debit:<\/strong><\/span> You can bet soaring US debt is probably why the Saudis and China aren’t losing any sleep over their continuing sales<\/a> of US Treasury bonds. Hey … they may as well sell them while they’re still worth something.<\/p>\n

Debit:<\/strong><\/span> In fact, many are calling the latest bond sell-off a bloodbath<\/a>. Of course, those sales are causing bond prices to fall. And remember, falling<\/em> bond prices result in rising<\/em> yields — which is why you probably noticed that interest rates have been moving sharply higher lately.<\/p>\n

Debit:<\/strong><\/span> The trouble is, there is now simply too much debt to sustain those higher interest rates, which is why you shouldn’t be too surprised if a market crash<\/a> is right around the corner. But even if a crash isn’t in the cards, higher yields will put a further drag on the economy because they make borrowing more difficult for both households and<\/em> corporations.<\/p>\n

Debit:<\/strong><\/span> Just how big of an impact are rising bond yields having on the economy so far? You tell me: Wells Fargo’s rates for a 30-year conforming loan have risen from 3.5% to 4.25%<\/a> during the past fortnight. To put that in perspective, the monthly payment for a 30-year $300,000 mortgage has increased 10% from $1,347 to $1476 — in just two weeks!<\/p>\n

Debit:<\/strong><\/span> The proof is in the pudding, as evidenced by a 30% drop in mortgage applications<\/a>. Needless to say, falling mortgage applications mean fewer buyers, which ultimately lead to falling home prices. And that results in reduced employment due to layoffs in the home building and finance sectors — not to mention the cancellation of countless house-flipping shows on HGTV.<\/p>\n

Credit:<\/strong><\/span> As financial analyst Bill Holter notes, when confidence in central banks is eventually lost, “The current bond selling will turn into a global panic, and there will be real world ramifications because the entire financial system relies on credit to function smoothly.” Hmmm. You mean decades of market manipulation really does<\/em> have consequences, Bill?<\/p>\n

Debit:<\/strong><\/span> For what it’s worth, Bill reminds us that crashing bond prices will<\/em> decimate pensions and ultimately destroy the currency markets too, which will result in hyperinflation<\/a>. Oh, relax! Other than that, the global monetary system is fit as a fiddle.<\/p>\n

Credit:<\/strong><\/span> Holter also claims that there’s no way out<\/a> of the financial mess the world is in “because ‘broke is broke’ mathematically” and confidence in central banks has only one way to go from here: down.<\/p>\n

Debit:<\/strong><\/span> The good news is the US has more than 8000 tons of gold to fall back on for just such an emergency. The bad news is the US Treasury seems to be unable to produce an audit trail<\/a> that verifies America still has all of the yellow metal in Fort Knox that it claims.<\/p>\n

Credit:<\/strong><\/span> Unfortunately for the US Treasury, when push finally comes to shove — and it will, eventually — they’ll no longer be able to get away with saying “trust us” because the rest of the world will be demanding this<\/em>:<\/p>\n