Created in 1913 with the enactment of the Federal Reserve Act, the Federal Reserve (the Fed) is the central banking system of the U.S. The Fed functions as the bank of the U.S. government, overseeing the nation’s financial institutions. As the central bank, the Fed safeguards and manages the U.S. economy and its money supply with its economic and monetary policies, which makes it a very powerful global player. Ben Bernanke is the current chairman of the Federal Reserve.
For the U.S. federal government’s fiscal year, which ends this Tuesday, the Congressional Budget Office (CBO) predicts a budget deficit of $506 billion. (Source: Congressional Budget Office web site, September 26, 2014.)
But just because our annual deficit is declining, that doesn’t mean our national debt is rising by an equal amount.
In fact, between September 20, 2013 and September 20, 2014, the U.S. national debt increased by $1.0 trillion. (Source: Treasury Direct, last accessed September 23, 2014.)
And the government is expected to post budget deficits until at least 2024.
According to a report released by the CBO, the U.S. government’s budget deficits will amount to $7.19 trillion between 2015 and 2024. (Source: Congressional Budget Office, August 27, 2014.) That’s roughly $780 billion a year on average.
Each year the government incurs a budget deficit, it has to borrow money to pay for its expenses and as a result, the national debt increases.
With the national debt now at $17.7 trillion, adding another $7.19 trillion takes the total to $24.89 trillion within 10 years. But as I showed you earlier in this story, government debt is rising at a much faster pace than national debt.
My prediction: a national debt of $34.0 trillion within 10 years.
For the current fiscal year, the U.S. government is estimated to pay $430 billion in interest on the national debt. The Federal Reserve has stated it plans to raise interest rates starting in 2015 and will continue to do so right through to 2017.
According to the CBO, interest payments on the government’s debt will triple within 10 years.
While I’m sure traders … Read More
Six years ago this month, in the midst of the Great Recession, Lehman Brothers, one of the most well-known investment banks in the U.S. economy, filed for bankruptcy.
At the time, Lehman’s bankruptcy sparked widespread worries…and the U.S. financial system teetered on the verge of collapse. For those of us who remember that time, there was too much uncertainty.
So, the Federal Reserve and the government stepped in to help the crumbling U.S. economy. Loans were made to companies that were “too big to fail,” interest rates fell to historic lows, and trillions of dollars in new money was printed (out of thin air).
Six years later, is the U.S. economy better off now?
Looking at Wall Street today, it looks like things couldn’t be better. The markets are close to all-time highs. The big banks are in better shape; their profits are rising and executives’ incomes and bonuses are big once again.
And speculation is back, big-time. As just one example, Facebook, Inc. (NASDAQ/FB) recently reached a market capitalization of more than $200 billion in hopes that the company will be able to make more money on mobile ads. Facebook is trading at a price-to-earnings multiple of 100!
The luxury market is hot again. Exotic cars are being sold at record prices. Sales of million-dollar-plus mansions are on the rise.
Sadly, on the other side of the coin, there have never been so many poor people in the U.S. economy, and the middle class hasn’t seen a return to the wealth and income they had before the Credit Crisis.
In 2013, 14.5% of the U.S. population was living … Read More
Last week, at the end of its regularly scheduled meeting, the Federal Reserve said:
1) It would continue to reduce the amount of money it creates each month. The Fed said it will be out of the money printing business by the end of this year. By that time, the Federal Reserve will have created more than $4.0 trillion new American dollars (out of thin air).
2) And when the Treasuries and mortgage-backed securities the Fed has bought mature, they will roll them over—which means they will just continue collecting interest on the securities they bought as opposed to taking the cash when they mature. (Source: “Press Release,” Federal Reserve, September 17, 2014.) I doubt the Fed has any choice on this. If the Fed doesn’t roll over the Treasuries it has bought, who would buy them when they hit the market?
The Federal Reserve also provided its economic projection on where it expects the federal funds rate, the key U.S. interest rate, to be down the road:
1) The central bank believes the U.S. economy will grow between two percent and 2.2% in 2014, then grow in the range of 2.6% to three percent in 2015. From there, it goes downhill. In 2016, the Federal Reserve projects more of the same—U.S. economic growth of between 2.6% and 2.9%. In 2017, the U.S. growth rate is projected to be sluggish and in the range of 2.3% to 2.5%. (Source: “Economic Projections,” Federal Reserve, September 17, 2014.) Hence, we are looking at four more years of slow growth.
2) A majority of the members of the Federal … Read More
According to the Investment Company Institute, investors have been taking money out of U.S. equity funds since April of this year.
Between April and July of 2014, investors pulled $32.0 billion from long-term stock market mutual funds that invest in U.S. stocks. While August’s monthly figures are not available, looking at weekly data, it appears investors ran away from the stock market in August as well. (Source: Investment Company Institute web site, last accessed September 16, 2014.)
How does a stock market rise when investors are selling? Well, there is a bigger anomaly in the stock market you need to be aware of.
Another indicator is suggesting investors are scared about the stock market. The yields on long-term U.S. bonds have been declining since March despite the Federal Reserve’s prediction that interest rates are to rise sharply next year and in 2016.
Chart courtesy of www.StockCharts.com
As the chart above shows, yields on long-term U.S. bonds continue to go lower. Again, this is on the backdrop of the Fed getting out of the money printing business (and warning investors that interest rates are going to rise).
U.S. bonds have historically gone down when the Fed has told us interest rates are going to rise. But the fear of higher rates (and lower bond prices) is overwhelmed by the strong demand for U.S. bonds, as scared stock market investors jump into U.S. bonds—where they believe their money will be safe.
There are definite cracks starting to show in the stock market. While we hear and read about the main indices moving higher, there are fewer and fewer companies reaching new price … Read More
Getting a sense of where stocks are going to go in the year ahead is always difficult with the major indices at their all-time highs.
The fundamental backdrop is still very favorable for equities. While the Federal Reserve has put off raising interest rates for the near future, the cost of capital, especially for corporations, remains extremely low. And corporate balance sheets remain in excellent condition with strong cash positions and good prospects for rising dividends going forward.
The stock market recovered extremely well from the financial crisis and subsequent crash in 2008/2009. But it wasn’t until early 2013 that I saw the beginning of a new cycle for stocks, or a bull market as it were.
Until then, I viewed the market’s performance purely as a recovery period from the previous cycle, which was the technology bubble.
Many of the technology stocks have only now recovered to their previous highs set in 1999 and 2000. The recovery cycle took a long time to play out and the catalyst for its breakout was, not surprisingly, the Federal Reserve.
Stocks can move significantly higher in a rising interest rate environment, but only from a low base, which is what we have now. And within the context of a new market cycle or bull market, the economy can experience a full-blown recession and stocks can experience meaningful corrections.
The two most important catalysts for the equity market near-term are what corporations actually report about their businesses and the Federal Reserve’s actions.
The surprising weakness in oil prices should be evident in corporate financial results (especially in the fourth quarter). Old economy industries … Read More
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