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Black Coffee: Is the National Debt About to Spin Out of Control?

It’s time to sit back, relax and enjoy a little joe

Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.

I hope everyone is enjoying their weekend! Let’s get right to it, shall we?

“Capitalism cherishes interest rates that are determined by savings, not credit creation by a central bank.”

— Ron Paul

“Anyone who is prosperous may, by the turn of fortune’s wheel, become most wretched before evening.”

— Ammianus Marcellinous

Credits and Debits

Credit: As respected financial analyst Jim Grant warns, today we’re experiencing an economy with boom-era stock prices coupled with depression-era interest rates. And while that sounds like the best of both worlds, the problem is those two things are completely incongruent with one another.

Credit: Yale economics professor and Nobel laureate, Robert Shiller, ostensibly agrees. He says the steep run-up in this market rally is similar to the excesses of the 1920s; for those of you who failed your high school history class, that was before the October 1929 market crash and Great Depression.

Debit: Is the stock market over-valued? Probably. But one thing is certain: two stocks, Apple and Amazon, are currently responsible for nearly 30% of the S&P 500’s gain so far in 2018. That doesn’t instill a lot of confidence in the health of the broader market.

Debit: At a time when consumer confidence is absolutely soaring, the economic data are suggesting that big problems are right around the corner. For example, if the US economy was as healthy as many people seem to believe, would new vehicle sales have fallen 5.4% from the previous month, or be down 8.3% since September of last year? Hint: The answer is easier than these so-called stumpers:

Debit: By the way, another potential sign that the economy isn’t quite as rosy as advertised is the fact that, after four months of steady declines, pending home sales are at their lowest point since October 2014.

Credit: High-end residential homes are usually the canary in the coal mine when it comes to the health of the overall housing market. With that in mind, a new report shows that Manhattan home purchases dropped 11% last quarter from a year earlier — that’s the fourth straight quarter with a decline. And new market listings increased at an even greater rate, climbing 13% — that’s the most for a third quarter since 2011.

Credit: Did you see this? Central banks have emerged as some of the biggest buyers of gold this year, with purchases hitting their highest level in six years. And while gold buying has been dominated by China, Russia, Turkey, and Kazakhstan, Poland also bought gold for the first time since 1998. Na Zdrowie!

Debit: You, know … It’s almost as if central banks are preparing for a financial crisis on the horizon. They may be right; in an effort to stop the latest plunge in its beleaguered peso, Argentina’s central bank hiked interest rates last week to 65%. Yes, it’s an astounding figure, but not surprising — the peso has lost half (!) its purchasing power this year alone. That’s a truly amazing decline for the world’s 21st largest economy.

Debit: Of course, Argentina isn’t the only developed nation with debt issues; on Wednesday, Italian bonds had their worst day in more than two years after Italy approved a new budget that was far larger than anticipated. Imagine that.

Debit: The bond rout has apparently spread to America’s shores too, as the yield on 10-year Treasuries topped 3.16% last Wednesday — that’s the highest since 2011 — while the 30-year bond yield breached 3.32% which is its highest point since 2014. If you think new home and vehicle sales — which benefit from lower interest rates — are sagging now, you haven’t seen anything yet.

Debit: Speaking of large government budgets, the final numbers are in and it turns out that the US racked up nearly $1.3 trillion of debt in fiscal 2018. To put that in context, the $21 trillion National Debt now equals more than $138,330 for every working American; and the debt increase in fiscal 2018 alone equaled approximately $8172 per worker. I know. But it will all work out. Well … as long as we have one of these:

Credit: Rising interest rates also portend the expectation of higher inflation down the road, which is always concerning for those looking to preserve their purchasing power. The good news is the cost to buy a vowel on Wheel of Fortune hasn’t changed in more than four decades; in fact, the price has been $250 since the American game show’s debut in 1975.

Debit: Then again, according to CNBC, “A rising interest rate isn’t necessarily bad. It’s generally a sign that the economy is doing well.” Huh? Tell that to the people living in Venezuela, where the government’s most recent juvenile “solution” of lopping five zeros off all prices failed to stop the raging hyperinflation that has thoroughly shredded the social fabric of their socialist paradise. Forward, amigos!

Debit: Meanwhile, a writer at the usually-astute Daily Reckoning smugly asserted this week that inflation “is simply part of a growing economy” — which falsely intimates that economies can’t expand in the absence of rising prices. Apparently, the writer is unaware that productivity gains make economic growth possible in a steady price environment. But why bother us with basic economic facts?

Debit: In reality, inflation is an unnecessary scourge that primarily benefits free-spending governments and bankers at the expense of almost everyone else. But there are too many unfounded claims about the “benign” nature of inflation that mislead people who accept at face value everything the press — and ivory tower “academics” — feed them. Sadly, that seems to be a large segment of the population today.

By the Numbers

Is buying a house a better investment than the stock market? Here are some numbers that show it all depends on the timing:

700% The cumulative gains in the S&P 500 since 1991.

164% The cumulative gains in the US housing market since 1991.

79% The cumulative gains in the S&P 500 since the peak of the dot-com bubble in 2000.

85% The cumulative gains in the US housing market since the peak of the dot-com bubble in 2000.

233% The cumulative gains in the S&P 500 since the tech-bubble bottom in October 2002.

60% The cumulative gains in the housing market since the tech-bubble bottom in October 2002.

273% The cumulative gains in the S&P 500 since the Great Financial Crisis bottom in March 2009.

36% The cumulative gains in the housing market since the Great Financial Crisis bottom in March 2009.

Source: Business Insider

The Question of the Week

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

Last Week’s Poll Results

On average, how many personal checks do you write per month?

  • 5 or less (60%)
  • None (29%)
  • More than 5 (11%)

More than 1500 Len Penzo dot Com readers responded to last week’s question and it turns out that nearly 3 in 10 of them pay all of their bills either electronically or with cash. On the other hand, 1 in 9 still write more than five checks every month. Over the years, the number of checks we write monthly has dropped from more than 10 to roughly five today.

Insider Notes: Who Is Killing the US Dollar?

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Useless News: Sugar Mama

A rich, lonely widow decided she needed another man in her life, so she placed a personal ad that read:

RICH WIDOW LOOKING FOR MAN TO SHARE HER LIFE AND FORTUNE WITH THE FOLLOWING QUALIFICATIONS:

1. HE WON’T BEAT ME UP
2. HE WON’T RUN AWAY
3. HE MUST BE GREAT IN BED

For several months, the widow’s phone rang off the hook, her doorbell was ringing constantly, and she received tons of mail — but it was all to no avail. None of the men seemed to meet her qualifications.

Then one day the doorbell rang yet again. She opened the door to find a man — with no arms and no legs — lying on the welcome mat. Perplexed, she asked, “Who are you and what do you want?”

“Hi!” said the man. “Your search is over, for I’m the man of your dreams: I’ve got no arms, so I can’t beat you up, and I’ve got no legs, so I can’t run away.”

“That’s great,” the widow replied, “But what makes you think you’re so great in bed?”

The man replied, “I rang the doorbell, didn’t I?”

(h/t: billhilly)

Other Useless News

Programming note: Unlike most blogs, I’m always open for the weekend here at Len Penzo dot Com. There’s a fresh new article waiting for you every Saturday afternoon. At least there should be. If not, somebody call 9-1-1.

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Letters, I Get Letters

Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: [email protected]

After reading the results of my margarine taste test, Rose Brownfield said this:

“I was buying your buttery spread and really liked it before you changed your recipe.”

I’m not in the margarine business, Rose; that’s a baseless rumor that shouldn’t be spread around.

I’m Len Penzo and I approved this message.

Photo Credit: brendan-c

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