In my last installment, I promised my next article would make the case for owning gold. I’m working very hard on that, and I am sure you’ll be quite pleased. I’ve also been ranting every week now about the sins of the financial industry, and more specifically the brokers and sales agents who make gravely mistaken recommendations to their clients. Like today’s horrible advice I heard on a radio show that people will be better off if they self-insure for their long term care needs. Shakin’ my head on that one.
In the meantime, a lot of things are going on. There are several major issues all happening at once, and it’s all happening right now. We’re looking at the debt ceiling, Trump’s budget, the last jobs report, and both Yellen’s rate hike as well as her promises for the future.
The repeal of Obamacare, as promised by Republicans, is a beast of its own, and I am not addressing it in this article. But I will state for the record that anything the government touches with its sticky fingers will include higher taxes and higher spending than predicted, vast inefficiencies, and a whole lot of political bickering, moaning, and wicked witches along the way.
The first issue is the debt ceiling. The national debt is currently at an astounding $19.92 trillion, and the ceiling is akin to your credit card limit. It is the maximum amount the government can borrow to fill out it’s budgetary deficit spending needs, but it excludes the biggest promises like OASDI and Medicaid/Medicare. If we include all that stuff as well, the total obligations the government owes all the citizens who are currently alive is estimated at $80-$100 trillion in promises.
The ceiling was hit on March 15 this year. No more moolah shmoolah, Sammy. Washington can’t legally borrow any more cash until the politicians can actually agree on how much to raise the borrowing limit.
The difference between your credit card and the national debt is that your maximum credit line is based on your credit worthiness and your income. Do you pay your debts on time and can you afford to pay your debts? The bank who gives you the credit determines what the limit will be, and typically credit of all types don’t exceed 50% of income, though it’s preferable not to exceed about 38%.
It is not so with the government. Like an addict who doesn’t know it’s time to quit, the government decides on its own limit! What you can expect to see in the next few weeks are congressmen getting together to bicker with each other, only to raise the ceiling in the end anyway. Kind of like the addict who asks himself “should I take 3 more hits today or 4 more?” The problem I have with congress being in charge is that it’s possibly the only thing they can agree on: they never fail to raise the limit. If the government “shuts down,” you better believe that we’ll see some accounting jerry-rigging to shift funds between departments and keep the government running, Enron or Madoff style.
This time will not be any different, and the running balance of debt that the country owes will continue to grow at an exponential rate. We currently spend more than half a trillion more than we take in, and the Trump budget doesn’t make any change to this pattern. Any talk about the debt ceiling is just a mass delusion. By design, the fiat monetary system must increase the debt load on a continual basis in order to continue to work. If it sounds like a Ponzi, that’s because it is!
So let’s have a look at the budget. It’s gonna be yuuuge! As we dive in, let’s remember that this is just a budget proposal, and that Trump is a masterful negotiator. He’s making budget cuts as well as increases, and as a negotiator this is his low ball offer on cuts and over the top offer on the increases. The other side with whom he is negotiating is congress. We can be sure to see more political fireworks and bickering, especially from democrats like Chuck Shumer and RINO’s like John McCain. We can also be sure that we probably won’t hear any pols claiming “We’ve gotta pass this thing so that we can find out what’s in it!”
Spare yourself the reading, here’s a brief summary of what it says:
The 2018 Budget is being unveiled sequentially in that this Blueprint provides details only on our discretionary funding proposals. The full Budget that will be released later this spring will include our specific mandatory and tax proposals, as well as a full fiscal path. (Budget, pg. 5; emphasis added)
The budget proposal has an aim to eliminate or reduce hundreds of government programs in an effort to rein in spending at all levels. I like the sound of that, but I have a suspicion that it is only fluff, especially since this is only the discretionary spending of an addict who thinks he can regulate his habit. The pattern I noticed in all of the proposals is not to cut core responsibilities and not to cut the free stuff that the people are accustomed to receive. And again, mandatory spending is not even included here.
The proposal is all about trimming the proverbial fat from overlapped agencies and unnecessary redundancies, and things that are completely past their time. The total request for discretionary spending is $1.151 trillion, which is a reduction of $13.6 billion. I also laughed when I read that, because the full federal budget including all mandatory spending is nearly triple the discretionary request at $4.147 trillion. And the full federal budget that the previous administration gave us contains a projected deficit of the effective baseline of $612 billion, and rising.
In other words, the government is admitting they need to borrow at least $612 billion to fulfill the budget. I guess that’s better than needing $625 billion? When it comes to reining in the federal expenditures, it doesn’t look like Mr. Trump is doing a very good job at all, despite his tough rhetoric.
Speaking of his rhetoric, one of his biggest claims during the campaign and continually into the presidency is that he will bring jobs back to the country. And justifiably he is using the recent jobs report of 298,000 job gains to smirk at the Democrats. I admit it was a breath of fresh air to see double the average gains seen during President Obama’s tenure. Especially because certain sectors that desperately need gains came in strong, like manufacturing.
My issues with the jobs report, in general, are many (hedonics, geometric weighting, seasonal and regional factoring, and more). Of particular note here, is that despite congressional headwinds, all the jobs created in the last month are based purely on the hope that Trump will reduce costly regulations and reduce taxes on corporations. If you’re a business owner, lower taxes mean you have more cash to spend on anything you need to expand and grow your business, like more employees or facilities and equipment.
But nothing has passed into law yet, and standing in the way are Democrats and Republicans who vehemently oppose anything that Trump stands for. Schumer and McCain both come to mind again. Paul Ryan does too, as do many other politicians from both sides of the aisle. It’s a yuuuge road block standing in the way, and all the hopes we had for job creation could be blown out the window very quickly as one proposal after another receives less than the required congressional votes to become law. Case in point is the Obamacare repeal that wasn’t repealed last week.
Aside from congressional headwinds standing in the way of Trump’s job hopes, he also has Yellen standing in the way. Not only do rate hikes in a sluggish economy stand in the way of future jobs gains, but they also stand in the way of the current jobs taking hold and becoming permanent. I try not to say anything politically in favor of one side or the other, and I pride myself on be an equal opportunity criticizer of any and all politicians. But here goes: The Fed is supposed to be apolitical. Sure. That’s like saying your mother-in-law is not biased when it comes to anything you say or do.
Yellen was hired by Obama and so far she is demonstrating that she’ll do anything she can to make him look good and to try to prevent Trump from making America great again. She knows that raising rates into a weak economy would be highly detrimental. That’s why she waited until the last year of the Obama administration to raise rates by a quarter point. And the last weeks of his tenure to raise another quarter point. She developed her own formula to gauge the economy, using almost 20 data points. After the financial crisis of 2008, her formula would have triggered rate hikes. She neglected to follow her formula, then, and guess what she’s doing now?
At this time her formula is suggesting to lower rates, and again she is neglecting her formula. She raised rates again this month by another quarter point, and has promised at least another half percent by year end (two hikes of at least another 25 basis points each). This will be anything but good for balance sheets and cash flow statements of any company that owes cash at interest. In other words, as interest rates rise, more cash must be diverted from saving, cash on hand, or capital investments, rather to be redirected toward debt service. Less cash stays in the business, and less free cash flow can be used to grow the business. All your liberal friends and colleagues will soon be gathering for Kool-Aid, gloating over how they think higher taxes and regulation is the only thing that actually works.
As you look around at the economic landscape in the next few months, remember that there are political forces pushing against economic forces and vice verse. It will be anything but calm with lots of grand standing, showboating and chest pounding. More realistically what we are seeing now is the calm before the next storm. Take everything with a grain of salt, and watch out. By the end of the year we could witness more than your average correction, and rather witness a crash that will be yuuuge.
Despite all the hype about making America great again, anyone in the markets will be in for a very rude awakening as more economic data comes in. Even though the purchasing managers index and job growth are now trending up, other key indicators are falling. Commodities like iron ore and copper are down, indicating slowing building and construction.
The Atlanta Fed is estimating the first quarter of this year (January – March 2017) to have an annualized nominal GDP growth of just 0.9%. The St. Louis Fed is now tracking inflation to 2.8%, meaning the real GDP is negative! Yes, the economy is actually shrinking by about 1.9% annualized! St. Louis also tracks farmland as down 8% in Q4 2017, and ranch and pastureland off by nearly 4%. It has crops and livestock off by about 33% from its last peak in 2015. And finally, the St. Louis Fed has the non-performing bank loan ratio up by an astonishing 50% or more in the last quarter. Hardly indicative of a booming economy.
San Francisco Fed is reporting mounting pressure on wages combined with shortages of labor in many areas such as hospitality, semi-conductor, farming, pharmaceuticals, finance & banking, and others. If you think these tough conditions out of St. Louis and San Francisco are isolated, think again. The entire country and all 12 regional Federal Reserve Banks are reporting similarly difficult conditions.
Government can’t solve all our monetary problems by inflating debt, raising interest rates, and inflating equity markets, but if you like those ideas you’re reading the wrong blog. If you don’t think more debt with higher rates will make America and American businesses more solvent, you’ve gotta short the market. Watch for the long end of the yield curve to flatten out as the shorter term interest rates rise, closing the spread. As it flattens out, you’ll see reality set in on Wall Street, and the fireworks will be more exciting than the 4th of July.
Not only do I think stocks are in for a fall, but bonds also. To short the S&P 500 and short bonds, both with an ETF index fund, would be a wise move. I also recommend to hold lots of cash, because the opportunity to buy great companies on deeply discounted sale prices won’t last when this overheated market bottoms out. Whatever you do, please, I’m begging you, don’t do it on margin.
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