When there is a loss of confidence in financial assets, investors around the world sell them at the same time, which results in a financial crisis. These assets will, of course. be worth a fraction of what they were before. Financial institutions that own these assets may not have enough money to cover them. This causes financial institutions not to lend to people, because they have no liquidity. Without credit available in an economy from financial institutions, an economy contracts.
This is how a financial crisis translates into an economic contraction. This is why governments step in to provide liquidity to the banks—quantitative easing—in order to keep the economy from further contracting on itself. A financial crisis can bring an economy to its knees. The government’s job is to ensure there is no loss of confidence in the first place, because this is what triggers a financial crisis.
Hooray for the folks in Washington! The playground battles among politicians have settled for now, but trust me, it’s going to get nasty again as we move towards the extended deadlines in the New Year.
But for now, the government is open for business again and the Treasury can continue to make its interest payments on the enormous national debt. Yet the resolution agreed upon last Wednesday is only a bandage solution. The country has only delayed the inevitable—that it must control spending and its national debt.
The nearly $17.0 trillion in national debt and annual deficits continue to grow, adding to the mounting financial crisis America could witness not long down the road if the spending doesn’t stop. I don’t think I would be buying Treasury bonds anytime soon, as there are superior yields in other debt-laden markets, like Italy or Spain.
America has become somewhat of a jester on the international stage. China is talking about making the renminbi the de-facto global currency. I think this is more wishful thinking than anything; more likely, it’s just some propaganda to remind the United States it needs to work out its national debt situation. China does hold about $1.7 trillion in U.S. national debt, so the country should be concerned. I kind of wonder how much interest the Chinese will have towards the future U.S. bond auctions.
When China said the national debt needed to be resolved, some genius in Congress said China should mind its own business.
Can you imagine a company telling its largest debt holder to take a hike and mind its own business? This would never … Read More
The month of September has been quite impressive in spite of what the historical records were suggesting could happen. Everyone is clearly anxious to hear what the Federal Reserve will say at its two-day Federal Open Market Committee (FOMC) meeting ending on Wednesday and whether Ben Bernanke will begin to taper the Federal Reserve’s bond buying.
My feeling is that no matter if it’s Wednesday or October or even December, the Federal Reserve will soon start to ease back on the throttle and begin the process of reducing the easy money that’s being pumped into the U.S. economy. Why the Federal Reserve meeting has turned out to be such an event is surprising.
Whether or not the taper is announced this week, you should get yourself stationed for higher bond yields down the road, as they are likely to move above the three-percent threshold from their current 2.92%.
I mean, who cares if the yield surges to over three percent? It’s going to eventually happen anyway. And unless you are happy with a yield of just over three percent, I really don’t think you will be rushing out to buy bonds. Lots of institutions and the rich will likely begin to shift capital away from equities and into bonds, but for many individual investors, it will be business as usual.
It may just become a bit harder to make money without the continued money printing from the Federal Reserve, but it’s not exactly an insurmountable hurdle. Yes, not all stocks will go up. You will need to be more selective in your stock picking. That means careful analysis; the Federal … Read More
Keep your eyes on China. One of the themes I keep reiterating in these pages is that our world is more interconnected than many investors think. While it is certainly important to be aware of how the American economy is performing, we cannot forget that we are part of the global economy.
While the U.S. is still a large player in the global economy, we are not alone at the top. Over the past decade, the Chinese economy has grown to rival our own in size, and its effects can be felt everywhere. The Chinese economy has been a huge driver for many parts of the global economy, including commodity prices and the materials sector.
However, recent attempts by leaders in that nation to shift the Chinese economy away from a production- and export-oriented nation into one that is driven more by domestic demand is causing significant problems.
The latest gross domestic product (GDP) data for the second quarter indicated that the Chinese economy grew at a 7.5% rate, according to the National Bureau of Statistics in Beijing. That was much lower than the forecast conducted by Bloomberg, of which the median estimate was for 7.7% growth in the Chinese economy. (Source: “China growth slows to 7.5% as 2013 target under threat,” Bloomberg, July 15, 2013, accessed July 16, 2013.)
Whether we like it or not, the global economy is heavily dependent on the Chinese economy. For much of the past decade, many companies, including U.S. firms, have deliberately focused their attention on the rapidly rising Chinese economy.
With the slowdown being worse than expected, I believe that this is … Read More
It seems like every day we’re seeing the stock market advance higher, which makes me wonder if traders are just trigger-happy and trading on the momentum in the market—and, trust me, there’s plenty of it.
Whether you are a day, swing, or longer-term trader, there’s easy money to be made. The Federal Reserve has provided you with this great opportunity, so take it.
The only issues that continue to cast a cloud over the situation are the state of the country’s finances, namely the national debt and the many municipalities and states experiencing economic hardship. Recall my previous commentary on the colossal financial crisis in Detroit. The city is burdened by a massive debt load, declining revenues, and a rapid decline in population migration that has spanned across more than three decades. But Detroit is not an aberration. There are other regions across America that have fallen into the same financial abyss.
What really puzzles me is that the stock market is acting as if everything around us is faring well—which is far from the truth.
The U.S. economy is not expanding at a pace that I would deem acceptable, given the reaction in the stock market. The media harps on about the fact that the growth of China’s gross domestic product (GDP) growth was only 7.5% in the first quarter, but that’s pretty darn good versus America’s GDP growth.
The scary part is that the Federal Reserve, in all of its great wisdom, has been downgrading the country’s GDP growth as Chairman Ben Bernanke and the other Fed members clearly realize that the economy is in trouble. That’s why … Read More
I just read about this doctor who made $570,000 in 2012, yet he didn’t feel rich. The article used “Jake Smith” to cover the person’s identity. In the interview, Mr. Smith said, “I think of rich as not having to worry about money, not having to worry about retirement, not having to worry about saving for your kids’ educations. I have three kids and I try to save up for their futures, and my retirement, and even with my salary I don’t feel secure.” (Source: Sachon, L., “I Made $570K Last Year, But I Don’t Feel Rich [In Fact, I Feel Worried],” The Billfold web site, May 17, 2013.)
OK, Mr. Smith is not rich like Bill Gates or the sports players who make enormous amounts of money for throwing a baseball or making a dunk, but at $570,000 a year, Mr. Smith should not feel worried.
Maybe he is caught in his own little world of self pity, but heck, there are tens of millions of Americans struggling on the other side of what has become a widening income gap. These people are not worrying about cars, fine dinners, college education funds, 401(k)s, or planning their next vacation—they’re struggling each day just to put some food on the table only to then have to worry about the next meal.
The federal minimum wage is $7.25 per hour, and could rise to $10.10 by 2015 if the Obama administration gets its way. That’s $15,080 per year based on a 40-hour week, and I doubt there are any benefits, medical coverage, or retirement plans involved.
So while Mr. Smith ponders his … Read More