Will the Dow Hit 30,000? A Check Up on the Economy.

State Street Advisors sculpture of Fearless Girl in its original location. She's now in front of the NYSE.

The numbers you need to know about what’s really going on. A check up on the latest indicators, and a sobering look at what is really driving the market, and emerging industries, like cryptocurrency, cannabis and the gold rally.
 
The Federal Reserve Board is widely predicted to lower interest rates by 25 basis points today at 2:00 p.m. ET. However, it’s important to remember that even though the White House and Wall Street are pressuring the Feds to act early, that doesn’t mean they will. December 2018’s rate hike is proof of that.
 
A slight majority of governors on the federal reserve board are keenly aware that pervasive low interest rates have created financial imbalances, overleverage and asset bubbles. Actually, all of them are aware of this. However, Randy Quarles, one of the current Administration’s recent additions to the board, believes “monetary policy should be guided primarily by the outlook for unemployment and inflation and not by the state of financial vulnerabilities.” (It’s hard to imagine a board governor actually saying this a mere 12 years after the worst bank meltdown the world has seen since the Great Depression.) Lowering interest rates at this time should keep unemployment low and inflation from sinking further. However, this is a risky move due to the level of leverage (which is eyepopping astronomical) and because the U.S. is already too close to zero to really get help from lower interest rates when the economic storms start swirling. 

What financial vulnerabilities? Which Feds are more hawkish? Check out my blog on these subjects by clicking on the blue highlight. See the data below for yourself.
 
Below is what I’ll cover…
 
Slow Growth
 

• GDP
• Real Estate
• Wall Street’s Massive Share Buyback Plan
• Foreign Investments in U.S. Real Estate
• Foreign Investments in U.S. Treasuries

 
Astronomical Debt
 

• U.S. Public Debt
• Consumer Debt
• Business Debt and Loans
• State & Municipal Debt
• Underfunded Pension & OPEB Plans

 
Market Highs and Elevated Risk
 

• Real Estate
• Stocks
• Bonds
• Money Market Funds

 
Emerging Industries
 

• Libra & Cryptocurrency
• Cannabis
• Gold

 
 
And here’s the data on each point.
 
Slow Growth
 

• GDP is slowing down. (See chart below.) This is an issue for many reasons. The White House and Treasury Secretary assured Americans that the tax cut would be paid for with GDP growth above 3% for the next decade. Economists warned that these projections were fairy land and that the deficit and public debt would soar. Today, the U.S. public debt has hit to $22 trillion, and will balloon ever higher in the coming days. The budget deficit in 2018 was $800 billion.

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Everyone loves lower taxes. However, in your own home, if you reduce your income, you know you had better cut your costs. Otherwise, you might lose your home or end up in bankruptcy court. The same holds true with the Federal government. The tax cuts dramatically reduced the income of the federal government. This was not made up for in economic growth, as the American people were promised. And now, debt and deficits have soared to all-time, perilous highs.

• Real Estate. Real estate prices have soared to all-time highs and are unaffordable to 74% of Americans, even with the lowest mortgage interest rates than we’ve seen in decades. U.S. sales are also pulling back, albeit slowly, with a drop of 2.2% year over year in June of 2019 (source: National Association of Realtors).

 

• Wall Street’s Massive Share Buyback Plan. 25% of the S&P500 had their earnings per share significantly pushed up in the 1st quarter of 2019 by share repurchases, according to S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt. Of the 208 issues that have reported in the 2nd quarter of 2019, almost 30% (61) have reduced their share count by 4% or more, creating at least a 4% tailwind in their earnings. 73%  of the companies in the S&P500 have an active share repurchase program. As Howard Silverblatt warns, “We need to separate EPS growth in two categories – actual growth verses growth from share count reduction. You don’t want to pay the same multiple for buybacks as you do for growth.”
• Foreign Investments in U.S. Real Estate. Foreign investment in U.S. existing homes sank by 36% over the last year.
• Foreign Investments in U.S. Treasuries. In 2016, Russia had $90.6 billion in long-term U.S. treasuries. By May of this year, that number had dropped to just $12 billion. At the same time, Russia is dramatically increasing its gold reserves. Learn more in my Russia blog. China’s long-term U.S. treasuries holdings were $1.2 trillion in 2016. This year, the holdings are down to $1.1 trillion. China’s sell-off hasn’t been as swift as Russia’s. However, the trend line is headed down, and the trade war isn’t helping.
  
  Astronomical Debt
  
  
• U.S. Public Debt. The U.S. public debt is currently at $22 trillion – and will soar even higher once the Debt Ceiling is officially lifted. When the Tax Cuts were announced the Treasury Department and the White House assured Americans that economic growth would mean they could start paying down the debt. Few economists believed that sustained growth of 3% or higher was plausible. The Congressional Budget Office warned that soaring debt and deficits were likely to occur. Sadly, that has happened. 
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• Consumer Debt. Consumer debt has soared to an all-time high of $13.76 trillion. $1.5 trillion of that is student loan debt, with $1.3 trillion in auto debt. Student loan defaults are running at about 20%. So, when we see a GDP report touting consumer spending, like we did in the advance estimate of the 2nd quarter GDP growth of 2.1%, we have to be mindful that this is not healthy spending that is happening from more room in the budget. It is spending done by borrowing from the banks (often with high-interest credit cards) to purchase things. The default rate on credit cards (90 days or more delinquent) is currently at 5.04%. However, with cards charging up to 29% interest, once the shift happens and these debts become due, the crunch will be swift and severe. 

Source: Federal Reserve Bank of New York Center for Microeconomic Data. (c) 2019. Used with permission.

• Total Debt and Loans. Total debt, all sectors, is at $45.4 trillion. Total loans are at $27.4 trillion. For a grand total of debt securities and loans of $72.8 trillion. This astronomical level of debt is accompanied by market highs in real estate, stocks and bonds. (See below.) What’s the risk? According to the Federal Reserve Board’s May 2019 Financial Stability Report:

 
Elevated valuation pressures tend to be associated with excessive borrowing by businesses and households because both borrowers and lenders are more willing to accept higher degrees of risk and leverage when asset prices are appreciating rapidly. The associated debt and leverage, in turn, make the risk of outsized declines in asset prices more likely and more damaging. Similarly, the risk of a run on a financial institution and the consequent fire sales of assets are greatly amplified when there is significant leverage involved. 

In other words, the economy today looks a lot like it did in 2008, when we had to bail out the banks. Next time, however, the banks will resort to a bail-in program – on your dime. (Keep reading.)
 

• State & Municipal Debt. Detroit and Stockton bankruptcies (and more) and the current pension crisis in Illinois, New Jersey, Connecticut, Kentucky and Colorado (and other states) remind us that borrowing from Millennials and Gen Z to pay the Baby Boomers is an unfair and disastrous plan. Many corporations and governments have made pension promises that they are having trouble keeping. And this is in good times, with stocks are at an all-time high. According to Pew Charitable Trusts, almost half of the U.S. states (24) were 70% underfunded on their state pension funding. As of 2017, there was only $2.9 trillion set aside to cover $4.1 trillion in liabilities. Only 8 states were at least 90% funded (Wisconsin, Idaho, Nebraska, New York, North Carolina, South Dakota, Tennessee and Utah).

Used with permission.

 

• Underfunded Pension & OPEB Plans. According to a 2018 report by S&P Dow Jones Indices, U.S. corporate pensions and other post employment benefit plans (like health care) are underfunded by $453 billion. Since this is at a time when stocks are at an all-time high, it’s a huge red flag. As you can see from the chart below, when markets fall, so do pension funding levels. At the last two market highs (before the Dot Com and Great Recessions), pensions were actually overfunded!

 
Market Highs and Asset Risks.
 

• Real Estate. According to the National Association of Realtors, the median price of existing homes (all types) increased to an all-time high of $273,800 in June of 2019. Up to 74% of denizens cannot afford to purchase a home in their own community.
• Stocks. Stocks hit an all-time high this month. The rally began after the June 18-19, 2019 Federal Reserve Board meeting, when the Feds began “signaling” a willingness to cut rates if the economy needed it. So, the rate cut may already be priced in.
• Bonds. Over 50% of investment grade corporate bonds are at the lowest level, just above junk status. In the 2019 Financial Stability Report, the Feds describe a potential scenario where the economy weakens and there is a snowball effect of losses and illiquidity.

 

1. First, there are credit downgrades.
2. Then investors panic and want to sell.
3. However, the junk bond market is small and not very liquid.
4. Therefore, you could be stuck with your bond, which may not be able to be sold, or will have to be sold in a fire sell, if you desperately need the funds.
5. In other words, you need to understand exactly how much debt and how vulnerable your investment grade bonds and bond funds are. Now…

 

• Money Market Funds. Money market funds now have redemption gates and liquidity fees, meaning you could be charged to withdraw your money, and you may be limited in the amount you may withdraw. This is part of a new bank “bail-in” plan on your money.

 

Emerging Industries
 
Libra & Cryptocurrency. Facebook’s Libra cryptocurrency has a vision to create a more globally inclusive currency, based in block-chain and backed by a basket of assets (unlike most cryptocurrency that have no asset backing). The obstacles include a pervasive, inherent lack of trust that users have about Facebook. Additionally, government entities, like Congress and the Federal Reserve Board, want a thorough examination of Libra before it is allowed to infiltrate the monetary system. As for Bitcoin, Ethereum, Litecoin and others, these are mostly trading platforms. Very little actual consumption purchases are happening with the coins themselves simply because you can’t have a currency that is valued at $20,000/coin on one day and $6,000 just a few months later.

• Cannabis. Cannabis products and CBD are the fastest growing industry on the planet. Well, in fairness, this has always been a popular industry. It’s just legal now, at least in Canada. However, investors have to be quite adept to profit at this early stage of the game. Tilray soared to $300/share in mid-September of 2018, crashed to $99/share in less than a week, and is currently trading at $40/share. Check out my last three cannabis blogs, listed in the end credits of this article, for an example of how active and astute you must be to capitalize on this volatile industry.
• Gold. The Gold Rally has begun! Will it last? Click to access my Gold Rally blog.
  
  

 The Bottom Line
If the Feds cut interest rates, that, historically, kicks Wall Street back into gear. However, the “smart money” knows that the cut is coming due to economic weakness. Additionally, a rate cut is already built into the current record-highs.
 
If the Feds don’t cut interest rates, something that few on Wall Street are expecting to happen, it’s because they are concerned about financial stability. The “smart money” will understand quite clearly that the Feds are deliberately taking away the punch bowl of this bull market, which has been largely built upon businesses and consumers borrowing from Peter to pay Paul. In this case, we may see another Wall Street tantrum, such as we saw in December of 2018, when the Federal Reserve Board dared to defy the White House and raised interest rates. Stocks sank 10%, for the worst performing December since the Great Depression.
 
In either scenario, it seems very clear that we are in the latter days of this business cycle. That’s not what you’re going to hear from your broker-salesman. They will tell you how great your investments are doing (now that stocks, real estate, etc. are at an all-time high). That is why you have to be the boss of your money, and adopt a time-proven plan that doesn’t have a leaky roof that floods your financial home when economic storms hit.
 
I’ll offer comments on the Fed decision on my Twitter feed around 2:00 p.m. ET today. You can access it on the home page at NataliePace.com.
 
 
 Now is the time to fix the roof while the sun is shining (while the markets are at an all-time high). 

If you'd like to learn time-proven strategies that earned gains in the last two recessions and have outperformed the bull markets in between, join me at my Wild West Investor Educational Retreat this Oct. 19-21, 2019. Click on the flyer link below for additional information, including the 15+ things you'll learn and VIP testimonials. Call 310-430-2397 to learn more. Register by July 31, 2019 to receive the best price. 

I'm also offering an unbiased 2nd opinion on your current retirement plan. Call 310.430.2397 or email info@NataliePace.com for pricing and information. ​​​​​​​
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6 Risky Investments. 12 Red Flags. 1 Easy Way to Know Whom to Trust With Your Money.
Whom Can You Trust? Trust Results.
October Wipes Out 2018 Gains.
Will There Be a Santa Rally in 2018?
The Dow Dropped 832 Points. What Happened?
​Bonds are In Trouble. Learn 5 Ways to Protect Yourself.
Interest Rates Projected to Double by 2020. 
5 Warning Signs of a Recession.
How a Strong GDP Report Can Go Wrong. 
Should I Invest in Ford and General Electric?

Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

Information has been obtained from sources believed to be reliable however NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.