Global debt levels have reached unprecedented levels, pension deficits are rising and the US interest rate cycle is on the turn. Frank Holmes, chief executive of highly regarded investment management group US Global Investors, believes that investing in gold is a logical response to current, unnerving conditions.
“For centuries, investors and savers have depended on gold in times of economic and political strife, and its investment case right now is as compelling as it’s ever been.”
“Total global debt levels reached an astronomical US$217 trillion in the first quarter – that’s 327% of world GDP.”
“Gold’s investment case becomes even more compelling when we consider the US Federal Reserve’s next moves.”
A disgraceful milestone was reached this week when US government debt busted through the $20 trillion level and quickly went over $20.1 trillion.
Can $21 trillion, or $25 trillion, be far ahead? Why not $40 trillion, so our grandkids and their grandkids can be even more indebted to the Chinese and other countries that buy our debt but aren’t very nice to us.
This isn’t the kind of milestone you celebrate or even want noticed. So you didn’t hear a peep about it from the White House or from Congress, which is responsible for our wanton spending.
PG View: This massive — and growing — debt is going to require that rates be kept extraordinarily low and the dollar weak. With the Fed seemingly destined to start selling assets into that market, there are going to be some opposing forces in play, which could lead to market volatility.
Toys R Us could file for bankruptcy as soon as this week, according to sources familiar with the matter.
The sources noted that the bankruptcy plans are not definite, and both its plans to file and its timing could change.
…Addressing the retailer’s debt load prior to the crucial holiday season could give its major vendors such as Mattel and Hasbro clarity into the company’s long-term viability to help ensure the toymakers continue to stock its shelves throughout the holiday.
PG View: If you missed our special report on the death of brick-and-mortar retail and the broader implications, you can view it HERE.
Daily Reckoning/James Rickards/09-15-17
Right now, the United States is officially $20 trillion in debt. Over half of that $20 trillion was added over the past decade.
And it looks like annual deficits will be at the trillion dollar level sooner than later when projected spending is factored in.
Basically, the United States is going broke.
…There’s only one solution left, inflation.
PG View: Despite massive and extraordinary efforts totaling in excess of $4 trillion, the Fed has failed to generate even 2% inflation. What does Rickards suggest? “The Fed can call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per ounce,” says Rickards. Voila! Massive inflation.
“History shows that raising the dollar price of gold is the quickest way to cause general inflation. If the markets don’t do it, the government can. It works every time.” — James Rickards
The U.S. federal government’s gross debt surpassed $20 trillion on Friday, according to a daily Treasury Department statement.
The debt jumped from $19.8 trillion to $20.1 trillion after Congress suspended the debt ceiling for three months, allowing the Treasury to borrow again on the open markets.
For months, it had been using off-book extraordinary measures to keep from defaulting. Since President Trump signed a bill including the debt-limit lift Friday, it was able to start unwinding those measures with regular borrowing and increase the debt.
Real Investment Advice/Lance Roberts/09-07-17
What to do? This is not as an innocuous question as one might think. For most American families, who have to balance their living standards to their income, they face this conundrum each and every month. Today, more than ever, the walk to the end of the driveway has become a dreaded thing as bills loom large in the dark crevices of the mailbox.
…The burden of debt that was accumulated during the credit boom can’t simply be disposed of. Many can’t sell their house because they can’t qualify to buy a new one and the cost to rent are now higher than current mortgage payments in many places. There is no ability to substantially increase disposable incomes because of deflationary wage pressures, and despite the mainstream spin on recent statistical economic improvements, the burdens on the average American family are increasing.
…Beginning in 2009, the gap between the real disposable incomes and the cost of living was no longer able to be filled by credit expansion. In other words, as opposed to prior 1980, the situation is quite different and a harbinger of potentially bigger problems ahead. The consumer is no longer turning to credit to leverage UP consumption – they are turning to credit to maintain their current living needs.
There are currently clear signs of stress emerging from credit. Commercial lending has taken a sharp dive as delinquencies have risen. These are signs of both a late stage economic expansion and a weakening environment.
PG View: This is a rather distressing assessment of the current situation and goes a long way toward explaining why growth remains anemic with little prospect for improvement.
A potential standoff over the U.S. federal debt ceiling is raising alarm bells among fund managers who fear a repeat of 2011 when a protracted showdown over increasing the government’s borrowing limit and subsequent downgrade of U.S. credit quality led to a more than 15 percent slump in the S&P 500 stock index.
U.S. investors are raising cash and buying protection, bracing for a messy fight ahead of the Treasury Department’s Sept. 29 deadline to raise the debt limit, a legal cap on how much the U.S. government is allowed to borrow.
Failure to increase the debt ceiling could lead to a recession and prompt the first significant sell-off of the Trump administration. The benchmark S&P 500 has not fallen by 5 percent or more in over a year, the longest streak without such a decline in more than 20 years.
PG View: Given the current trends in the dollar and gold, I’d opt for the latter as my preferred safe-haven . . .
Treasury Secretary Steven Mnuchin said Thursday that aid for Hurricane Harvey relief could impact the timing of the need to raise the debt ceiling. Mnuchin said Sept. 29 remains the date by which Congress should raise the borrowing limit, but added that Treasury’s spending will be affected in September by an aid package. “There could be some impact of a couple of days,” he said.
These days it is Ms Yellen who has more cause to fear political risk upsetting the bond markets. The US Congress has to raise the “debt ceiling” by late September to allow the government to continue financing itself. These occasions were bad enough when Mr Obama was president. The Republican Congress repeatedly used the threat of default to pursue its wrong-headed obsession with trying to cut spending.
Given Donald Trump’s eccentricity and his fraught relations with Mitch McConnell, the Senate leader, there is an even greater chance of chaos. Mr McConnell said this week there was “zero chance” that the debt ceiling would not be raised. But Mr Trump’s threat at his bombastic rally on Tuesday to close down the government if he did not win funding to build his Mexican wall sent shivers through debt and foreign exchange markets.
Given Donald Trump’s eccentricity and his fraught relations with Mitch McConnell, the Senate leader, there is an even greater chance of chaos…
Project Syndicate/Mohamed A. El-Erian/08-17-17
Ten years ago this month, the French bank BNP Paribas decided to limit investors’ access to the money they had deposited in three funds. It was the first loud signal of the financial stress that would, a year later, send the global economy into a tailspin. Yet the massive economic and financial dislocations that would come to a boil in late 2008 and continue through early 2009 – which brought the world to the brink of a devastating multi-year depression – took policymakers in advanced economies completely by surprise. They had clearly not paid enough attention to the lessons of crises in the emerging world.
Anyone who has experienced or studied developing-country financial crises will be painfully aware of their defining features. For starters, as the late Rüdiger Dornbusch argued, financial crises can take a long time to develop, but once they erupt, they tend to spread rapidly, widely, violently, and (seemingly) indiscriminately.
In this process of cascading failures, overall financial conditions quickly flip from feast to famine. Private credit factories that seemed indestructible are brought to their knees, and central banks and governments are confronted with tough, inherently uncertain policy choices. Moreover, policymakers also have to account for the risk of a “sudden stop” to economic activity, which can devastate employment, trade, and investment.
The economy continues to grow weaker despite all of the Fed, Wall St. and media propaganda to the contrary. The economy is growing weaker due to the deteriorating financial condition of the consumer, which is by far the biggest driver of GDP in the United States. The only way the policy-makers can avoid a systemic collapse is “helicopter” money printing, in which printed cash or digital currency credits is, in some manner, distributed to the populace.
The Fed reported that non-revolving consumer debt (not including mortgage debt) hit $2.6 trillion at the end of the first quarter. Student loans outstanding hit a record $1.44 trillion. Recall that at least 40% of this debt is in some form of delinquency, default or “approved” non-pay status. Auto loans hit a record $1.2 trillion. Of this, at the very least 30% is subprime. A meaningful portion of the auto debt is of such poor credit quality when it’s issued that it is not even rated. Credit card debt is now over $1 trillion dollars and at a record level. The average outstanding balance per capita is $9600 per card for those who don’t pay in full at the end of the month. Just counting the households with credit card debt balances, the average balance per household is $16,000. The average household auto loan balance for all households with a car loan is over $29,000.
The data shows a consumer that is buried in debt and will likely begin to default at an accelerating rate this year. In fact, I’d call these statistics an impending economic and financial disaster.
PG View: And they wonder why this has been the weakest recovery since the 1930s . . . IF the Fed resorts to money printing as the solution, gold is going to go through the roof.
After deleveraging in the aftermath of the last U.S. recession, Americans have once again taken on record debt loads that risk holding back the world’s largest economy.
Household debt outstanding — everything from mortgages to credit cards to car loans — reached $12.7 trillion in the first quarter, surpassing the previous peak in 2008 before the effects of the housing market collapse took its toll, Federal Reserve Bank of New York data show. To put the borrowing in perspective, it’s more than the size of China’s economy or almost four times that of Germany’s.
People are borrowing more not necessarily because they’re confident about their financial prospects. They’re doing it for necessities like education or transportation and, in many cases, just to get by.
PG View: We don’t really “trust” debt do we? It can certainly be a beneficial tool, but when it reaches $12.7 trillion, there is reason to be very concerned.
Talking to the BBC’s World at One Mr Rogoff said that levels of personal and corporate debt had risen in the global economy.
This was while interest rates had been held at historic lows in many countries, to encourage investors to borrow and spend after the financial crisis.
“If something was to happen that pushes interest rates up, we could see a lot of soft spots – places where there is high debt – start to unravel,” Mr Rogoff said.
He also said that the economic policies of the White House were creating uncertainty, without naming specific policies.
Washington Examiner/Susan Ferrechio/08-08-17
Both Democrats and Republicans in Congress are poised to stand in the way of lifting the nation’s borrowing limit next month, increasing the chances of real problems for House and Senate leaders as they try to increase the debt ceiling by an end-of-September deadline.
House and Senate conservatives have long insisted that debt ceiling increases be accompanied by spending reforms, and that hasn’t changed this year, even under a Republican president who is insisting on a “clean” debt ceiling increase.
…Potentially more troubling for the prospects of a debt ceiling increase, the largest group of conservatives, the Republican Study Committee, announced Tuesday it will also oppose a straight increase without spending cuts.
That means if a “clean” debt ceiling hike is to happen, it will need support from a majority of Democrats. But this year, that may not happen.
U.S. consumer credit-card debt just passed an ominous milestone, beating a record set just before the global financial system almost collapsed in 2008.
Outstanding card loans reached $1.02 trillion in June, data from the Federal Reserve show, as lenders including Citigroup Inc. and JPMorgan Chase & Co. compete to sign up cardholders who may carry balances — a relatively lucrative business in a prolonged period of low interest rates.
The bet is that this time it won’t end so badly. In 2008, a drop in home prices spiraled into a global financial meltdown, and after the jobless rate surged toward 10 percent, banks wrote off more than $100 billion in credit-card loans over the next two years.
PG View: I’m sure this time it will be different . . .
FT/Alan Smith & Stephen Foley/08-08-17
A decade after the credit crisis began, it will still be years before there is a final reckoning on the costs of the government bailouts of the financial sector that followed.
The International Monetary Fund took a snapshot of the costs of the bailouts in 2015, calculating the extra debt taken on by governments relative to the size of their economy. The fund also calculated how much had been recouped by that point two years ago.
…In one country — the United States — taxpayers were already up on the deal…
Elsewhere, governments such as Ireland and Greece are not likely to recover the full amounts and will be working through the costs, borne in the form of higher public debt, for years to come.
PG View: Another ongoing drain on growth . . .
The savings rates in the US and the UK are dropping, and economists are trying to figure out what that means.
When the US government released its annual revisions to economic growth last week, it made sharp downward revisions to the personal saving rate. Savings as a share of disposable income was 4.9% last year, not 5.7% as earlier calculated, the Bureau of Economic Analysis said.
The update showed that incomes were less than previously reported, while consumption was higher.
Albert Edwards, a Societe Generale strategist and permabear, published the doomsday interpretation of this data in a note on Thursday. For Edwards, it’s the eve of the financial crisis all over again.
“Every day more evidence mounts that almost exactly the same debt excesses that caused The Global Financial Crisis (GFC) in 2008, are present today,” he said.
Slumping savings rates in the US and the UK were last seen in 2007, “just before the bursting debt bubble blew the global economy and financial system to smithereens.”
Congress will confront a potentially devastating financial crisis in September as lawmakers scramble to avert a government shutdown and prevent the nation from defaulting on its debt for the first time in history.
Treasury Secretary Steven Mnuchin has warned congressional leaders that the government will run out of money to pay its bills by Sept. 29 unless lawmakers vote to raise the debt limit.
Funding to keep the government open is set to expire two days later, on Oct. 1, unless Congress can agree on a spending deal during the approximately three weeks it will be in session in September.
“September is going to be a very difficult month. Obviously all of this is coming into play right away,” House Freedom Caucus Chairman Mark Meadows, R-N.C., told reporters before the House adjourned for its August recess.
Washington Post/Damian Paletta/08-01-17
Talks between the White House and the Senate’s top Republican and Democrat broke up Tuesday with no progress on raising the country’s debt ceiling, an impasse that threatens a financial crisis if left unresolved.
The Senate and House have 12 joint working days before Sept. 29, when the Treasury Department says it would no longer be able to pay all of the government’s bills unless Congress acts. A default would likely set off a major disruption to the world financial system, with a stock market crash and surging interest rates that could send the economy into a recession.
PG View: Congress ALWAYS raises the debt ceiling, but only after much hand-wringing and delay . . .
U.S. Treasury Secretary Steven Mnuchin on Wednesday urged Congress to raise the federal debt limit before lawmakers leave Washington for their August recess to avoid higher interest costs to taxpayers and market uncertainty about a potential default.
Mnuchin told a Senate Appropriations subcommittee that maintaining U.S. creditworthiness was of “utmost importance” and that the United States must pay its bills on time.
“As I’ve suggested in the past, based upon our best estimate at the time, we do have funding through September, but I have urged Congress to take this up before they leave for the recess,” Mnuchin said.
The last extension of the federal borrowing limit expired in March with total debt of around $20 trillion, but the Treasury has extended its ability to issue debt by employing extraordinary cash management measures, including deferring reinvestment in federal employee pension funds and suspending sales of savings bonds and debt instruments to state and local governments.
NYT/Keith Bradsher & Sui-Lee Wee/07-23-17
Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about “gray rhinos” — large and visible problems in the economy that are ignored until they start moving fast.
The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires.
Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a “gray rhinoceros,” without naming specific companies.
Chinese regulators have become increasingly concerned that some of the biggest conglomerates have borrowed so much that they could pose risks to the financial system. Banking officials are ramping up scrutiny of companies’ balance sheets.
It won’t take much for the Federal Reserve to raise short-term interest rates too far, triggering an economic reversal making indebted students, corporations and other borrowers unable to repay loans, according to billionaire bond manager Bill Gross.
“Central bankers and indeed investors should view additional tightening and ‘normalizing’ of short-term rates with caution,” Gross, who runs the $2.1 billion Janus Henderson Global Unconstrained Bond Fund, said in an investment outlook published Thursday.
Bloomberg/Saleha Mohsin & Liz McCormick/07-17-17
Treasury Department officials called bond traders and their advisers on Friday to assure them that the Trump administration isn’t considering prioritizing U.S. debt payments if Congress fails to increase the nation’s borrowing authority later this year, according to two people familiar with the matter.
The calls came after Bloomberg News published a story about worries among traders that Treasury Secretary Steven Mnuchin may have to employ a secret plan written by the Obama administration to make sure debt payments are made, potentially at the expense of salaries for government employees, payments to contractors and other obligations.
The Congressional Budget Office forecasts the federal government will hit its debt ceiling some time in October. Treasury Secretary Steven Mnuchin has urged Congress to increase the nation’s borrowing authority without brinkmanship, as in 2011 when a political showdown triggered the first downgrade of U.S. debt.
Yahoo Finance/Julia La Roche/06-25-17
Legendary bankruptcy expert Dr. Edward Altman cautioned that this benign credit cycle — characterized by low default rates, low yields, low spreads, and lots of liquidity — could come to an abrupt end.
“It’s been a terrific market for investors for quite a long time and if anything is concerning it’s that we now are more than eight years into a benign credit cycle,” Altman, a professor at NYU Stern School of Business, told Yahoo Finance. “We’ve never had such a long benign cycle. And just that one little fact is something that we should be concerned about because if it comes to one and it could come to an end very dramatically.”
Altman, the creator of the financial-distress sniffing Altman Z-Score, warned in mid-2007 of a “Great Credit Bubble” and that there was going to be trouble in the market. He predicted that a meltdown would stem from corporate defaults. While the primary culprit of the financial crisis turned out to be mortgage-backed securities, investors who heeded Altman’s warning nevertheless avoided a lot of grief.
…Troublingly, Altman sees the reckless behavior of 2007 surfacing again.
BusinessInsider/Jacqui Frank & Kara Chin/06-09-17
Legendary investor Jim Rogers sat down with Business Insider CEO Henry Blodget on this week’s episode of “The Bottom Line.” Rogers predicts a market crash in the next few years, one that he says will rival anything he has seen in his lifetime.
It’s going to be the biggest in my lifetime and I’m older than you. No, it’s going to be serious stuff. We’ve had financial problems in America — let’s use America — every four to seven years, since the beginning of the republic. Well, it’s been over eight since the last one. This is the longest or second longest in recorded history, so it’s coming. And the next time it comes — you know, in 2008, we had a problem because of debt. Henry, the debt now — that debt is nothing compared to what’s happening now. In 2008, the Chinese had a lot of money saved for a rainy day. It started raining. They started spending the money. Now, even the Chinese have debt and the debt is much higher. The federal reserves, the central bank in America, the balance sheet is up over five times, since 2008. It’s going to be the worst in your lifetime, my lifetime too. Be worried. — Jim Rogers
PG View: Rogers sees this happening “later this year or next.” And while the Fed will attempt a rescue as they did in 2008, “this time it won’t work.”
After bingeing on credit for a half decade, U.S. consumers may finally be feeling the hangover.
Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters. And with economic optimism having lifted borrowing rates since the election and the Federal Reserve expected to hike further, it’s getting more expensive for borrowers to refinance.
PG View: Americans have essentially borrowed their prosperity from the future. The trouble is, when the future becomes the present, consumers reach a burden that won’t let them borrow any more and the severely cut back their consumption and the economy stalls.
Fewer subprime borrowers are paying off their auto loans early, a possible sign that consumers with weaker credit scores are struggling more, according to a report by Wells Fargo & Co. researchers.
Borrowers are making fewer extra payments on loans that were bundled into bonds in 2015 and 2016, compared with loans in 2013 and 2014 bonds, according to Wells Fargo analysts led by John McElravey. The data on prepayments may offer another sign that subprime consumers are having more trouble paying their bills, the analysts wrote in a note dated Tuesday. Borrowers are already defaulting on a growing amount of auto debt.
Last decade, slower monthly payment rates on credit cards were an early sign of the consumer credit cycle changing for the worse, the analysts wrote.
Virtually every class of US debt — sovereign, corporate, unsecured household/personal, auto loans and student debt — is at record highs. Americans now owe $1tn in credit card debt, and a roughly equivalent amount of student loans and auto-loans which, like the subprime mortgage quality that set off the 2008 financial crisis, are of largely low credit quality (and therefore high risk).
US companies have added $7.8tn of debt since 2010 and their ability to cover interest payments is at its weakest since 2008, according to an April International Monetary Fund report. With total public and private debt obligations estimated at 350 per cent of gross domestic product, the US Congressional Budget Office has recently described the path of US debt (and deficits) as almost doubling over the next 30 years.
But this is not just a US phenomenon. Globally, the picture is similarly precarious, with debt stubbornly high in Europe, rising in Asia and surging across broader emerging markets. A decade on from the beginning of the financial crisis, the world has the makings of a fresh debt crisis.
PG View: It’s as if we learned absolutely nothing over the past 10-years.