What a year! As you have probably heard, the Fed is pumping billions into the repo market weekly to keep the banking system from freezing up and malfunctioning. National debt is increasing at a rate of 80 billion a month. Fed chairman Jerome Powell has lowered interest rates and assured everyone there are no more plans to hike this year or until we get some serious inflation. The media is obsessed with impeachment, the trade agreement, Fortnite, and bulletproof cyber trucks, while stocks and bonds are completely disconnected from fundamentals like corporate earnings and inventory build. All the while, assets are melting into an enormous bubble, and the velocity of money has been declining.
At the phase one trade deal signing, and Davos, President Trump made another remark about negative interest rates. He has been pushing this idea more than ever. During a recent speech at at the World Economic Forum, Trump said “We’re forced to compete with nations that are getting negative rates, something very new…meaning, they get paid to borrow money, something I could get used to very quickly. Love that.” It’s evident that he is pressuring the Fed to get there sooner rather than later. So I thought I’d write about how we got here, what it means, and where it will lead us in the future. Hint: it’s all bad news.
First, negative interest rates mean that the bank pays you to take out a loan. You read that correctly; THE BANK PAYS YOU TO BORROW. Could things get any crazier? It would certainly be nice to have a system with a never-ending money printer. None of us would ever have to work, and the printer would just keep on giving into eternity…no ink, no paper, just some tweaking of the machine. Unfortunately, there are lenders involved in the credit process, who want to get something back for letting you use their money. But with negative rates, anyone who happens to have any kind of savings or money put away in CDs, bonds, etc. will pay the bank, not vice versa. In this backwards reality, holding and saving in the currency is discouraged. It’s a money-losing proposition.
A Stocktwits analyst recently told me that debt grows forever, and it’s normal, not a problem. He doesn’t believe there’s anything to worry about in the stock market. If you look closely, there are companies now with enormous debt balances that don’t make any money…yet their stock valuations are much higher than those companies that do make money. Tesla, a company that has never made a profit has a market cap of $100 billion. Why? People are investing in dreams, not reality. Fact is, credit works in cycles. Raising interest rates slows down economic growth and inflation, while lowering interest rates stimulates economic growth and creates inflation. Since we can’t raise rates, it looks like we are at the end of a long-term debt cycle. Both lenders and borrowers will lose big.
Wonder why the stock market is up so high and why Trump is touting the U.S. economy as the greatest in the world? Look around at all the retail closings, yet the stock market makes record highs every day. Anyone with a brain can see it has nothing to do with a strong economy. You think because the Fed keeps borrowing and injecting money in to the system, the stock market must go up? Do you think that one day the Fed or Trump is going to tell you to sell stocks before it goes up in smoke? Do you think it will go up quickly again after it falls? Think again. The stock market is like a bouncy ball balanced perfectly on top of a pin. It’s what is holding the dollar up as the world reserve currency. But it’s not independent of the world.
At some point, the U.S. dollar will take a big hit and everything will become much more expensive for Americans. Trump tweets frequently that we have the best economy in the history of the United States and the world, yet when the Fed tried to raise interest rates to service the debt, it couldn’t do so without crashing the market. Plain and simple, this means the debt is too large. They cannot and will not solve the problem, the elephant in the room, the thing that nobody is talking about. Now comes a devaluation in the dollar and the U.S. losing world reserve currency status. It’s coming, believe me. You can’t continue to debase the currency and expect it to stay strong. You can’t expect people with money to pay you to borrow. It won’t work for long. It’s not sustainable.
Fact is the Fed is lowering rates and borrowing at a pace of $22.2 billion a week because foreigners and domestics are not buying new U.S. debt at the pace the government now needs to keep things going. This doesn’t even account for the gigantic leverage in the banking sectors. Right now everyone is piling into stocks, because they’re going up, but when the dollar goes down (supply and demand); they will retreat like Speedy Gonzales. The U.S. national debt is now $23.2 trillion, and they’re adding more than a trillion every year. Do you know how long it takes to count to a trillion? About 32,000 years. One trillion brings us back to the Ice Age, and that’s counting to just ONE! Multiply by 23.
I deplore, the only reason the United States is able to have such a debt load is because the dollar is the world reserve currency. The rest of the world is holding dollars and trading in dollars, and that’s what keeps it afloat. It’s not because we’re great…it happened because we used to have the most gold and we used to peg the dollar to gold. But do you think foreigners would buy treasury bonds if there were negative rates, to fund the U.S. government’s debt binge? Not a chance, and the last I checked, 30% of the U.S. debt was held by foreigners. The Fed is in a corner, and the stock market thinks it’s a big party. People are living in a fantasy, relying on a government who doesn’t have the courage to tell people the truth, because there are consequences. You and I will pay the price.
With lower taxes, stable prices, and a stock market that never stops going up, Trump wants us to go negative. But why? Why on Earth would anyone want to hold negative yielding assets with counter-party risk at the end of a debt cycle? Things are way out of balance. The Fed is not God and they will lose control. LOWER INTEREST RATES WILL LEAD TO A MUCH LOWER DOLLAR, which means everything will cost a lot more in dollars than it does now. Yes, a lower dollar will encourage other countries to buy more of our stuff, but that comes after destruction. Americans will then have no choice but to import less and produce more, until the dollar has completely collapsed.
The United States is not really an independent sovereign empire. We are a big player in the global economy. But our foundation is built on a loan which the government cannot stop growing without deep pain to its people. When the world stops lending to us, it’s over. If you’re depending on a retirement nest you’ve built up in the stock market, keep this looming fact in mind…you can lose it all in a heartbeat. There’s no bones about it; we are in a big mess. The emperor has no clothes, and the dollar doesn’t either.