Of all the different elements of the economy, the direction of interest rates is most important. That’s why, as the editors of Profit Confidential, we expend a considerable amount of our time analyzing and providing guidance on interest rates. We believe that the unprecedented debt the U.S. has accumulated will eventually result in foreign investors demanding a better return on U.S. Treasuries. Too many U.S. dollars in circulation will also eventually force interest rates to rise.
Economics 101 suggests inflationary pressure builds during periods of low interest rates. The demand usually increases when people both borrow and consume more. As the price of goods and services is directly correlated with demand, it increases—resulting in inflation.
To tackle inflationary pressures, central banks increase interest rates. Why? Because once they increase interest rates, it is supposed to do the opposite of lowering the rates—forcing people to save and cut back on discretionary spending.
Following a 30-year down-cycle of interest rates in the U.S., we are on the cusp of a new 30-year up-cycle in interest rates; a move that could cripple the government and the economy. This is mainly because the government has added too much debt to its balance sheet, and the Federal Reserve has printed significant sums of money.
After phenomenal amounts of bailouts were doled out, followed by non-stop government spending, the U.S. national debt rose 76.2%—from $9.2 trillion in 2008, to $16.3 trillion in 2012. (Source: TreasuryDirect, last accessed November 27, 2012.)
It gets worse. The current administration said it would keep the budget deficit below $1.0 trillion. It hasn’t. For fiscal 2012, the federal budget deficit was $1.1 trillion, slightly below the $1.3 trillion deficit recorded in 2011. (Source: U.S. Department of the Treasury, October 12, 2012.) What’s more, 2012 marked the fourth consecutive year in which the U.S. government experienced an annual deficit above $1.0 trillion. As a percentage of gross domestic product (GDP), the U.S. government’s budget deficit for the year 2012 stands at seven percent.
Along with skyrocketing government debt, the Federal Reserve has printed $3.0 trillion. Where did the $3.0 trillion come from? It’s not backed by gold. It was simply created out of thin air. And, the presses continue to print an additional $85.0 billion a month!
Looking at an even bigger picture, between January 2000 and September 2012, the amount of U.S. money in circulation (the “M1 money supply”) has increased 112%, or $1.25 trillion. That’s a lot of money printing.
Similarly, the “M2 money supply,” which includes the M1 money supply plus savings deposits, balances in money market mutual funds, and deposits, has increased 118%. M2 is a better measure of actual money supply. Since the beginning of 2000, M2 money supply has increased more than $5.4 trillion. (Source: Federal Reserve, October 11, 2012.) Again, the printing presses have been in overdrive.
Now think of it this way; as more money is created and more debt is added to the federal government’s balance sheet, U.S. economic viability becomes questionable. What does this mean? The interest rate at which the government is currently able to borrow is being kept artificially low. With the government adding more debt and the inflationary pressure building—something has to be done.
The housing market simply isn’t improving at the rate many in the mainstream media are telling us.
Home prices are still significantly lower than what they were during 2005 and 2006. On its own, there is no housing market recovery. All we are witnessing is the mere reflection of easy money provided by our central bank.
As I often write, to see a real recovery in the housing market, we need to see first-time home buyers active in the market. Unfortunately, they are not involved.
In April, first-time home buyers accounted for only 29% of all existing home purchases in the U.S. housing market. This was three percent lower than the previous month and 17% lower than April 2012, when first-time home buyers accounted for 35% of all home purchases. (Source: National Association of Realtors, May 22, 2013.)
According to a survey by Fannie Mae, last month, 40% of Americans said it’s a good time for them to sell their home. In April, the survey showed only 30% thought the same thing, and in the same period a year ago, this number stood at 16%. (Source: Realtor Magazine, June 11, 2013.) Hence, we are going to see more listings hit the housing market.
The inventory of homes for sale in the U.S. housing market increased four percent in April from the previous month nationally, but what’s troubling is that in a few areas, such as Stockton and Sacramento, California, new listings have surged 75% from a month earlier.
The basic concept of economics: when demand declines and supply increases, prices go down.
And the most common mortgage in the … Read More
In a fascinating work on long-run economic cycles, J. Anthony Boeckh’s book The Great Reflation offers up some poignant research on the U.S. economy and its cycles.
The Great Reflation is a non-political, historical breakdown of inflation, monetary and fiscal policies, interest rates, and long-wave economic theory. It was completed in 2010 and made several predictions on the U.S. economy that have turned out to be correct so far.
Boeckh, former publisher of the Bank Credit Analyst, delves into past financial manias, asset inflation bubbles, asset allocation for the aftermath, the U.S. dollar decline, commodities, and the monetary future of the stock market and the U.S. economy.
Here is a summation of Boeckh’s observations:
1. The global financial system will always remain flawed and subject to price inflation and bubbles, so long as it is based on fiat paper money.
2. Before 1914, most Western countries had a monetary regime that legally restricted central bank money creation based on its holdings of gold.
3. Average interest rates fell throughout the 100 years leading up to 1914.
4. In the absence of a financial system based on discipline and restraint, all anchorless fiat money systems (especially the U.S. economy) are destined to suffer inflation and instability.
5. Investors will be playing cat-and-mouse with the Federal Reserve for years to come—a problem caused by excessive private and public debt.
6. Deleveraging of the private sector bodes well for the transition process to the next long-wave cycle (2015+).
7. If the U.S. economy can’t help reduce the debt-to-gross domestic product (GDP) ratio in a timely manner, investors will face a public-sector debt supercycle … Read More
India, the biggest consumer of gold bullion, is witnessing over-the-top demand—to the point where the government is trying to curb demand.
The Finance Minister of India said last week, “Banks have a role to play in dampening the enthusiasm for gold. I think the RBI [Reserve Bank of India] has advised banks that they should not sell gold coins.” He added, “I would urge all banks to please advise their branches that they should not encourage their customers to invest in or buy gold.” (Source: “P. Chidambaram hints banks likely to stop gold coin sales to curb demand,” The Indian Express, June 7, 2013.)
The appetite for gold bullion by Indian consumers has forced its government to increase the import tax on the yellow metal to eight percent—it has increased this tax rate twice in the past six months!
But the Indian economy isn’t the only one experiencing a surge in gold demand.
The acting director of the U.S. Mint, Richard Peterson, was quoted last week saying, “Demand [for gold bullion] right now is unprecedented…” (Source: “US bullion coin demand still at unprecedented levels-US Mint Chief,” Reuters, June 5, 2013.)
Looking at the sales of gold bullion coins from the U.S. Mint, demand has more than doubled. In the first five months of this year ending in May, the U.S. Mint sold 572,000 ounces of gold bullion in coins. In the same period a year ago, the Mint sold only 283,500 ounces of gold bullion. (Source: The United States Mint web site, last accessed June 7, 2013.)
Dear reader, the numbers are speaking louder than the words. Even … Read More
Quantitative easing may have been needed in the U.S. economy when the financial system was on the verge of collapse, but artificially low interest rates and vast amounts of paper money printing could be creating major troubles for our future, just like it did in the Japanese economy.
The Bank of Japan and the Japanese government have taken a strong stance on bringing economic growth to the Japanese economy. The Bank of Japan has taken the concept of quantitative easing to a new level, and it plans to continue increasing the country’s money supply. Similar to what’s happening here in America, the Bank of Japan is printing new money to buy government bonds. Japan’s central bank has become heavily involved in the stock market of the Japanese economy by buying units in exchange-traded funds (ETFs) and real estate investment trusts (REITs).
Sadly, the outcomes of this rigorous quantitative easing are dismal. The Japanese economy isn’t improving. Rather, the currency of the country has become a major victim, and the stock market in the Japanese economy is bursting.
Take a look at the chart below, which shows the value of the Japanese yen (black line) declining continuously, while the stock market is rising and bursting (red/black line).
Chart courtesy of www.StockCharts.com
On May 23, the stock market in the Japanese economy took a turn downward; since then, it has been declining quickly.
When I look at this, it makes me question the stability of the key stock indices here in the U.S. economy. The … Read More
The average American Joe isn’t participating in the U.S. housing market. As a matter of fact, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, investors purchased 69% of “damaged” properties in April 2013, while first-time home buyers accounted for only 16% of “damaged” purchases.
It is very well documented in these pages how home prices in the U.S. economy are being driven upward by institutional investors. Affirming my stance on the U.S. housing market, Suzanne Mistretta, an analyst at Fitch Rating Services, was quoted this week as saying, “The [housing price] growth is being propelled by institutional money… The question is how much the change in prices really reflects the market demand, rather than one-off market shifts that may not be around in a couple of years.” (Source: Popper, N., “Behind the Rise in House Prices, Wall Street Buyers,” New York Times Dealbook, June 3, 2013.)
Major financial institutions like The Blackstone Group L.P. (NYSE/BX) have become major buyers in the U.S. housing market. Blackstone has spent more than $4.0 billion for 24,000 homes in the U.S. housing market that it plans to rent out.
Rising prices on homes in various pockets of the U.S. housing market are a direct result of large institutional investors buying in.
Take Atlanta, for example. Blackstone bought 1,400 properties worth more than $100 million in Atlanta last year. (Source: Bloomberg, April 25, 2013.) And what happened to prices for homes in Atlanta? According to CoreLogic, a housing data compiler, home prices in Atlanta increased 12.4% in the 12-month period ended February 2013, compared to a 10.2% increase in the overall U.S. housing … Read More
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