The Insanity Of The Markets

Global debt is at $246 billion dollars, roughly three times global output. There are over $15 trillion in negative yielding bonds globally and even Germany has joined the party with their 30 year bond below zero for the first time.

US Consumers add to the wild ride of this global economy posting over $14 trillion in debt, above the levels seen prior and during the Great Recession.

The Financial Times published a story recently highlighting the steep rise of Baby Boomers, now also seniors, filing bankruptcy in the US at a pace far exceeding their contribution to the total population stating, “The culprits are vanishing pensions, soaring healthcare costs and tens of thousands of dollars in unpaid student loans for themselves, their children and even their grandchildren.”

The Wall Street Journal very recently published a story about the inverted yield curve, a concern being echoed by economists and finance leaders globally stating, “Shorter-term bond yields have climbed above longer-term ones, a phe­nomenon known as an in­verted yield curve. That tends to hap­pen ahead of re­ces­sions.”

Finally there is the burden of debt for the US making it’s ability to intervene in a slowing economy with stimulus even more costly looking forward. As reported by The Balance, “On February 11, 2019, the U.S. debt exceeded $22 trillion. That puts the U.S. debt-to-GDP ratio at 108 percent.”

The issue of debt and political complexity is critical and is best summarized by this, “The problem is in cutting it. Each program has a constituency that lobbies Congress. Eliminating these benefits loses voters and contributors. Congress will agree to cut spending in someone else’s district, but not in their own.”

The article continues with this point;

“Any president must cut into the biggest programs to make an impact on the debt. More than two-thirds of government spending goes to mandatory obligations made by previous Acts of Congress. For FY 2020, Social Security benefits cost $1 trillion a year, Medicare costs $679 billion, and Medicaid costs $418 billion. The interest on the debt is $479 billion. To lower the debt, military spending must also be cut. The most Obama spent was $855 billion in FY 2011. The most Bush spent was $666 billion in FY 2008. Instead of cutting, Trump is breaking all those records. Military spending rose to $989 billion in FY 2020.”

In recent weeks I have heard enthusiasm from those who benefit from what results in a scenario like this. As global investors pursue a flight to quality in US Treasuries and other high rated investments, borrowing costs decline. This can lower rates on everything from Mortgages to Autos. And an inverted yield curve is especially helpful to long term rates leading to cheers from mortgage lenders who now have the opportunity to refinance the mortgages of millions of Americans.

But for retirees with fixed income from investments and deposits as well as any investor needing yield, the implications are concerning. A return to a normalized yield curve is a far more healthy condition for the long term.

But let’s be clear, this is all news that should strike us with concern about this slowing economy. Unlike the last Great Recession, one that brought us closest to a national depression more than any other economic period since the 1930’s, this time the ability to intervene will be limited by the already low interest rate environment and an even more leveraged balance sheet both domestically and abroad. The ability to execute a stimulus plan in recession is better supported when there is a wider spread above zero.

As reported by Fortune Magazine, in a recent survey of economists 60% believe the US will be in recession before the election in 2020. While there is debate between those with the most bearish views and others who look at a more temperate downturn, there should be a heightened awareness about this economic burden for a nation whose wealth gap is only increasing, where housing affordability has become far more urgent to an ever increasing percent of the nation, with concern about health care costs, and where wage disparities for lower and middle class families are widening.”

Piling on with global political extremism, protectionist trade polices, the increasing costs of global weather conditions, and more only increase the concern for leaders, true leaders, to lay aside petty issues and focus on the long term viability of the ever increasing burden being laid upon this citizenship and future generations.

But whatever lies ahead, we should look at this latest rally in the long term bond markets as concerning to the economy versus a positive for its short term benificiaries.

What happens next? My advocacy here is for an active and engaged electorate. The passivity of this nation is something that should be abhorred. Eligible voters need to vote. In 2016 only 61.4% of Americans voted, down from 2014.

Awareness is step one, engagement is step two, activism is step three. We need to demand more as citizens and mute some of the incredible power of special interests in policy setting. Whatever one’s view, it simply won’t matter if we all don’t actively participate.