Investment Contrarians

Debt Ceiling

Debt Ceiling in US under Obama Administration

A “debt ceiling” is the maximum amount of debt that a government can take on. When a country borrows, it incurs debt. In an effort to prevent governments from borrowing in a reckless manner, a debt ceiling was imposed in 1917. The debt ceiling began with the Second Liberty Bond Act of 1917, and helped finance the United States’ entry into World War I. By allowing the U.S. Treasury to issue long-term Liberty Bonds and short-term debt instruments, the federal government held down its interest costs.

The government currently spends more money than it brings in through revenue; this translates into a deficit and a growing debt. There is also a limit on how high the debt can run. The debt ceiling first imposed in 1917 was set at $11.5 billion. Today, the debt ceiling is set at $16.4 trillion. Once the government broaches this limit, it becomes more difficult for it to borrow money. At the same time, Congress can vote to increase the debt ceiling and has numerous times. If the debt ceiling is not raised, interest payments on bonds would not be met and the country would default on its loans.

Debt increases when the government sells debt to the public to finance budget deficits. This increases the amount of debt held by the public. Debt also increases when the government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases the amount of debt held by government accounts. Combined, the debt held by the public and the debt held by government accounts is the total federal debt.

Did You Give Thanks this Weekend for the Fed’s Easy Money Policy?

By for Investment Contrarians | Aug 6, 2014

021213_IC_leongStock Market Crash August 2014.

Reflecting on this past Thanksgiving weekend, there was a lot to be thankful for, especially if you have been long in the stock market for the past four years. Now is a time for reflection.

The advance in the stock market has been stellar following the bottom in March 2009. The S&P 500 is up 171% since March 6, 2009 for a four-year annualized gain of about 38%.

In Japan, the Nikkei 225 is at a six-year high and over in Germany, the benchmark DAX is also at a record high.

However, the records in the stock markets are falling, not just in good old America, but worldwide. Of course, there are the exceptions, such as China, which I still consider to be undervalued and worth a look for investors searching for growth in foreign stock markets. In China, you can play almost anything due to the country’s insatiable appetite for goods and services. Some of the top areas for growth in China are the technology, health care, travel, and financial services sectors.

Yet while all of the stock market records are being set, I wonder if this is simply the new reality for stocks, or are we just setting ourselves up for a massive hangover when stocks fall? stock market crash 2014.

The Russell 2000, for instance, is a play on the economy. The idea is that small companies tend to fare better when the economy recovers, as these companies tend to be more flexible. The index is up over 35% this year and more than 40% year-to-date. That’s a great advance, but the … Read More

Markets Heading Higher on Bridge Deal a Bad Sign

By for Investment Contrarians | Oct 18, 2013

Bridge DealA bridge deal on the impasse and debt ceiling was reached in Washington on Wednesday. The deal will see the government reopen until January 15, and the debt ceiling will be extended until February 7 to allow both sides to try to hammer out a deal.

Now of course, the agreement doesn’t mean everything is rosy in Washington. A deal for the budget and an increase in the debt ceiling must still be forged. The extension of the deadlines just gives time for a deal to be ironed out and for the country to avoid an embarrassing default.

Yet the constant barrage of news on any developments towards the debt ceiling will continue to impact the stock market, as we move through the fourth quarter and into the New Year.

The stock market clearly favors the extension, as we see the stock markets rise on the news. Now, the Federal Reserve won’t likely begin to taper until after Ben Bernanke leaves office in January and, in fact, we may not see any tapering until later into 2014 under the direction of the next Fed Chairman Janet Yellen. The easy money will help support the stock market, but for further gains, there must be a fresh catalyst to drive stocks higher.

For investors, this doesn’t mean the stock market will continue to rally at the same rate. In fact, with the extension, perhaps traders could finally focus on what’s important: think third-quarter earnings and revenues, jobs, and the upcoming Black Friday and holiday shopping season. If these metrics pan out, then I would expect the stock market to advance higher into … Read More

Why There May Be More Easy Money to Come in 2014

By for Investment Contrarians | Oct 11, 2013

More Easy Money to Come in 2014Whoopee for Wall Street, investors, and the stock market!

No, I’m not “celebrating” the resolution of the government impasse or debt ceiling issues, but rather the expectations that the easy money may continue to flow.

As widely expected, Janet Yellen will become the next Federal Reserve chairman, replacing fellow easy money supporter Ben Bernanke when he says good riddance to the Federal Reserve in January.

With Yellen to become the first female chairman of the most powerful—but broke—central bank in the world, as far as the quantitative easing currently under debate, it will likely remain status quo. If this happens, then expect the easy money to continue to drive up stocks in 2014. You could continue to make tons of money by simply adding to existing stock positions.

Yellen is a big believer in using the government and the Federal Reserve to drive the economy, even as it’s becoming obvious that Bernanke’s strategy has largely failed. The economy, housing market, and the jobs market have strengthened, but this all cost trillions of dollars. And to make matters worse, the country’s economy continues to move along at a lackluster pace. There are also limited jobs out there for the 21 million Americans struggling to put food on the table.

This means that Yellen likely won’t ease off on the bond buying stimulus as fast as previous favorite Larry Summers would have if he decided to keep his name in the running for the Federal Reserve head.

In my view, the appointment of a Bernanke clone is worrisome. Hey, maybe she will be different in leading the charge, versus her current position … Read More

U.S. Debt Default a Buying Opportunity for Bond Investors?

By for Investment Contrarians | Oct 10, 2013

Buying Opportunity for Bond InvestorsI wasn’t going to talk about the government impasse and the upcoming debt ceiling deadline today, but it’s really the only thing people seem to want to discuss.

Even with the third-quarter earnings season flowing in, the headlines continue to want to key in the mess in Congress. Hey, I don’t blame them; America’s future is at stake in this critical showdown, which is why both parties want to make the best debt ceiling deal possible.

Could you imagine lending a substantial sum of money to a friend, and then you start hearing talk that your friend may not be able to pay you back?

Well, there’s some uneasiness developing in the world financial markets, as China and Japan are wondering—sometimes out loud—whether their more than $2.0 trillion in U.S. Treasuries are at risk. China held about $1.28 trillion in U.S. Treasury bonds as of July 31, according to the Department of the Treasury. Japan holds about $1.14 trillion in U.S. debt.

The problem is that unless the U.S. can resolve its debt ceiling crisis and move ahead; I expect there will be some hesitancy from the Asian powerhouses when deciding whether or not to buy U.S. bonds in the future; and this could have an impact on yields and what the Treasury has to pay. Without strong buying from China and/or Japan, the U.S. Treasury could be in trouble, since there would simply be no money left in the coffers. Luckily for now, investing in U.S. bonds for foreign reserves is still a better option than the alternatives, such as the euro or gold, but that could change.

The … Read More

Why a Debt Default May Not Be as Bad as It Seems for Investors

By for Investment Contrarians | Oct 9, 2013

Debt Default May Not Be as BadToday is day nine and counting of the U.S. government shutdown. At this point, of course, the bickering in Congress could magically stop and the politicians could hug and make up, ending the stalemate. However, I think the idea of the government coming to a resolution this soon is more fiction than reality.

My feeling continues to be that the government may finally solve the budget issue soon, but with the debt ceiling deadline on October 17, it’s likely to be a last-minute thing. In fact, there’s even a possibility no budget or debt ceiling deal will be agreed upon by October 17, based on the lack of progress we’re seeing right now. And while the White House may be considering a short-term increase on the debt ceiling limit, this isn’t an actual resolution—it’s just a temporary bypass.

However, if this short-term increase doesn’t occur (which is a possibility, given the government’s inability to agree), I really would not be that surprised to see the debt ceiling deadline come and pass. America would then run out of money and would default on its debt, bringing down the financial markets and the U.S. economy. The global economy would also be at risk.

Now, this may seem like just more fiction, but it could also happen: just like it was in 2011, the country’s debt could be downgraded due to the inability of the two parties to compromise on the debt ceiling,

And depending on how long the shutdown lasts, the impact on the country’s fourth-quarter gross domestic product (GDP) could be minimal or it could be larger. Bank of America Corporation … Read More