Debt Ceiling and Peter Schiff vs Trump

Peter Schiff is using the latest news about an attempt to end the debt ceiling as a way to promote his long gold positions:

Source: Peter Schiff YouTube

Of course Schiff works in the gold promotion industry and so it’s not surprising to hear all the ways Schiff interprets the news as being good for gold. He’s been wrong since 2012 when gold peaked but eventually he’ll be right again, at least for a little while.

Minus the gold bug doom and gloom spinning, let’s look at what’s really going on with the push to end the debt ceiling.

Debt Ceiling

President Trump said he would think about working with Democrats to end the limit on the country’s borrowing. According to The Washington Post, Trump and Schumer have agreed to work on a plan to eliminate the debt ceiling.

President Trump told reporters on Thursday that “there are a lot of good reasons” to get rid of it.

Speaker of the House Paul Ryan, R-Wis., specifically has come out against eliminating the debt ceiling.

Republicans Dishonest About The Debt Ceiling

Republicans have been dishonest about the debt ceiling for many years. The debt ceiling has nothing to do with being fiscally responsible. In fact, it is just the opposite. Using the debt ceiling to control spending is like a corporation using Accounts Payable to control costs. Dumb, right? In a corporation, Accounts Payable writes the check and mails it to a vendor. It would be detrimental to the health of a corporation for the boss to tell Accounts Payable to stop writing checks and paying vendors as a way to control costs. Vendors would stop doing work for the corporation and the entire business would implode. A boss controls costs by making decisions BEFORE an invoice gets to Accounts Payable for payment.

Another analogy is declining to pay a credit card bill or agreeing to go to dinner and then arguing about whether you’re going to pay the bill, after you’ve already eaten.

Congress is dumb to threaten to not pay its bills as a means of controlling costs. It destabilizes the country and sends the message that it’s risky working for or doing business with the US government. The time to control costs is during the budget approval process and NOT after the debt has already been incurred.

The debt ceiling is hardly more than a public manipulation tool of Congressmen to fool voters into thinking they are trying to control costs by voting against raising the debt ceiling, while at the same time voting for the government programs that caused the ceiling to be hit in the first place!

When Republicans took back the House in 1995, they brought back the debt ceiling vote as a way to pressure members on spending. Republicans would waver back and forth on using the debt ceiling vote. Sometimes they’d use the budget procedure to wave it through, and then other times they’d require the vote. It’s silly because it’s just politics and grandstanding. I mean how effective has the debt ceiling really been considering we have $20 trillion in debt?

If Republicans really wanted to control spending then they would vote for budgetary and spending decisions that would balance the budget. If Republicans really wanted to reduce government spending they would do that because that’s where the money is spent.

Richard Gephardt, D-Mo. has proposed the ‘Gephardt rule,’ which does away with the need for a second debt ceiling vote to approve borrowing once Congress has already voted once to approve spending that inherently necessitates borrowing.

Peter Schiff doesn’t know what he’s talking about when he claims that President Trump is for big spending and even bigger government and that his working with Democrats to end the second debt ceiling vote is somehow proof of that. I’m not sure Schiff himself honestly believes that. I think Schiff is playing to his alternative-news audience which are primarily gold bugs. Any bit of news that can be spun to support some lofty $5,000 an ounce for gold prediction, is what Peter Schiff does and boy does he do it well.

Jim Rogers Doom Predictions Are Nothing New

Jim Rogers recently claimed that he was expecting the worst market crash in modern times to hit within the next two years. Mainstream and alternative news sites are acting as if what Jim said is really alarming. It’s not.

Jim Rogers said the next time we have an economic problem in the US it’s going to be the worst of our lifetime.

Jim’s logic is that the world has been printing a lot of money and the whole world has a lot of debt. In 2008, we had a problem caused by too much debt, but now the debt is much larger than it was in 2008, so the next time we have a problem, it’s going to be even bigger than 2008.

The 74- year-old investor also repeatedly stressed that the crash was “going to be worst in your lifetime.”

Rogers said we’ve had financial problems in 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.

According to the 2014 book Excess Returns, in Rogers’ years as a professional investor, he beat the market by an average of around 30% per year.

Jim Rogers Doom Predictions Are Nothing New

The mainstream media and even alternative news sites like to hype Jim Rogers’ predictions as something alarming but one graphic really destroys that logic:

Being early is the same thing as being wrong. Had you listened to Jim back in 2011, you would have gotten killed shorting the market and you would have missed out on one of the greatest bull-market runs in stock market history. As Rogers has aged, he’s really destroyed his reputation as a market forecaster with his perma-bear view that the world is going to hell in a hand-basket.

You Haven’t Seen This Stock Market Correction Logic on Bloomberg

You will not see this stock market correction logic from AMTV (link above) in the mainstream financial media.

Christopher Greene thinks that a stock market crash of a lifetime is coming soon.

We are in a bubble today that is far worse than the technology bubble in 1999 and the real estate bubble in 2007. We are in the mother of all bubbles because of the Fed buying trillions of dollars worth of collateralized debt and the US government’s irresponsible spending of tax dollars during the Obama Administration that has taken the national debt to $20 trillion.

Every major asset class is in a bubble, including digital currencies now. Real estate is in a bubble. Automobiles are in a bubble. Oil is in a bubble (because Saudi Arabia is trying to control global production to prop it up). The stock market is in a bubble because of the Federal Reserve and QE and a $4.5 trillion balance sheet.

Stock Market Correction But Not Crash

I think Christopher Greene is overstating the magnitude of the coming stock market correction. Mr. Greene’s logical fallacy is that he is not figuring in what the Federal Reserve will do if the stock market does indeed start to crash. Mr. Greene’s logic assumes that the Fed will do nothing when markets begin crashing.

Remember, the Fed holds $4.5 trillion worth of collateralized debt. That gives the Fed major control over our economy and markets. For example, if the auto bubble pops and banks are stressed from a high level of defaulting car loans, the car loan debt will be collateralized and purchased by the Federal Reserve. Think about how much control the Fed has over our markets right now. We have a global holy war with radical Muslims murdering Americans and major terrorist attacks in the US and England but our markets keep going higher. We have the government Establishment trying to unseat a US President but markets keep going up. We have Qatar being financially attacked by Saudi Arabia and yet markets keep going up. We have President Trump bombing the sovereign country of Syria that is being protected by Russia and markets keep going up. We have North Korea testing nuclear bombs and long range missiles and markets keep going higher. We have China building man-made islands in the ocean and then claiming the area for miles around those islands in violation of international treaties and markets keep going higher. We have Mexico dumping criminals and drugs into our country and then threatening retaliation when we try and build a border wall yet markets keep going higher. We have a sitting President being sued for trying to restrict travel to this country from radical Muslim countries where people coming here are not properly vetted and markets keep going up. We have George Soros creating unrest using NGO’s around the world, including here at home but markets keep going higher.

Markets keep going higher because they are not based on economics and supply and demand. When everything can be securitized and propped up by the central bank, there are no major stock market crashes because the government won’t allow it. Christopher Greene is missing this logic by assuming that we still live and trade in a free market system. We have a government managed market much like the Chinese. If the market started to crash in a certain sector, the defaulting debt would be securitized, collateralized, and purchased by the central bank to prop up member banks. This is why I think we will see a deep stock market correction but not an actual stock market crash.

Here is the Christopher Greene video where he predicts the mother of all crashes:

China Debt Backed By Ghost Collateral

Lots of China debt is not backed by anythingLots of China debt is not backed by collateral even though accounting records and bank records show the debt is backed by collateral according to a new report by Reuters (link above).

When a Chinese bank makes a loan, auditors will go to a site to make sure that the collateral is there. The problem is that the collateral is often moved so that it simply vanishes when a bank goes to seize collateral after a bank loan goes bad.

The collateral is moved around to secure loans from multiple lenders. Reuters reports that a lawyer discovered that the same pile of steel was used to secure loans from 10 different lenders.

China Debt Secured By Missing Collateral

US investors and traders have known about China’s ghost collateral problems since 2014. The fact that much of China’s debt is unsecured is one of the reasons why I stay away from investing in Chinese companies via ADR listings in US markets.

Folks, much of China’s incredible loan origination growth has been built on nothing but hot-air. Hundreds of billions of dollars (maybe trillions) worth of loans are fraudulent as the collateral underwriting that China debt has been rehypothecated (like the Fed’s gold scheme) between many different debtors. If the Chinese economy suffers a hard-landing, banks will not be able to recover much of the pledged collateral. This will cause the hard-landing to spread outward like a tsunami through the financial banking system and China will be faced with a crisis like the 2008 global financial crisis.

The 2008 global financial crisis was the result of lax lending standards and overvalued collateral (i.e. houses). When the value of houses fell in the U.S., there wasn’t enough collateral to back the highly leveraged lending in subprime mortgages and the entire financial system collapsed. China is now facing its own collateral crisis with Moody’s downgrading China for the first time in 28 years. I wonder what debt rating agencies are going to rate China debt now that everybody knows that much of that debt lacks genuine collateral?

Just like our financial crisis in 2008 pulled down the rest of the world, so too will China if their financial system collapses.

Saudi Arabia Bond – Fat Chance You Oil Pumping Sharks

Saudi Arabia is now offering an international bond that yields 4.6%. The WSJ writes

The $6.5 billion 30-year portion of Saudi Arabia’s bond is set to pay 2.1 percentage points more in yield than a comparable U.S. Treasury, or around 4.6%. That is a sizeable pickup in a world where developed-market bond yields are on the floor or in negative territory.

Let me get this straight. Saudi Arabia targeted the US oil industry by flooding our markets with cheap oil. Mainstream media groups like the WSJ and CNBC were complicit in the scheme with only a few alternative bloggers like me critical of what Saudi Arabia was doing. Folks, what Saudi Arabia did was illegal according to international trade laws and it could even be viewed as an act of war.

The US is one of the biggest consumers of Saudi Arabia oil. By increasing supply to force down the price of oil, Saudi Arabia made a lot less money and hurt themselves in an attempt to hold on to market share. Saudi Arabia is going deeper into debt by the week.

Now Saudi Arabia has issued a bond to shovel their debt off onto Americans. Saudi Arabia wants you and me to buy their debt, and they’re willing to pay us a 4.6% yield to do so! The WSJ and other mainstream media groups seldom if ever criticize Saudi Arabia because the Saudis have a lot of influence, power, and money around the world.

Any American that buys this Saudi Arabia bond has lost sight of the forest for the trees. Buying Saudi Arabia debt is un-American in my opinion.

Folks, I hope debt crushes, Saudi Arabia. They deserve it. They put tens-of-thousands of Americans out of work and have forced many American businesses into bankruptcy. Saudi Arabia’s debt problem is of their own making, and as the Bible tells us, you reap what you sow.

I don’t buy China stocks because China is a horrible communist country that runs over its citizens with tanks. I won’t buy Saudi Arabia bonds because Saudi Arabia nationals were responsible for 911 and Saudi Arabia targeted the US shale oil industry to keep market share.

Think about it. It’s evil genius brilliant. Go into debt by oversupplying the US oil market and put US oil drillers out of business. Then get those same Americans to finance the debt that hurt their very own economy!

I’m by no means an “ethical” investor but come on folks, you don’t give your enemy weapons to turn around and shoot you with. It’s just common sense IMO.

We need to get smart, fast folks. We are getting beat at every turn. Everywhere you look the politicians that are running our government and negotiating international trade deals are doing so because of corrupt “pay-to-play” schemes and special-interest groups instead of what is best for America. If we don’t start putting America first, there won’t be an America to call home.

With So Much Debt In the US Economy, Is It Even Possible To Grow Faster?

The US national debt just broke above $19.5 trillion. Both Democrats and Republicans are to blame, but it is important to note that President Obama and Democrats increased the national debt more than all President’s before combined.

George Bush exploded the national debt by $3 trillion in response to an imploding economy and 911. Obama exploded the national debt by $10 trillion in response to an imploding economy.

Debt increases are a function of the government not being able to pay its bills because it has too little revenue (taxes) compared to costs (spending). When spending exceeds revenue you have a deficit. Since 2002, this is what quarterly deficits (or surpluses) have looked like.

The last time we have a surplus was back in 2001, some 16 years ago. That’s sad.

The interest on the $19.5 trillion dollar debt is about $482 billion a year or more than $60,000 per US citizen.

How does the US government finance the deficit?

The Crowding Out Effect

The U.S. Treasury sells IOUs in the form of bonds or treasury bills directly to the private capital markets and uses the proceeds of the sales to finance the deficit.

The US Treasury is competing directly in the capital markets with private corporations, which may also be seeking to sell bonds and stocks to raise money to invest in new plant equipment. To compete for these scarce investment dollars, the Treasury typically must increase the interest rate it is offering to attract enough funds. Running a huge deficit is largely a zero sum game because funds to finance the deficit would otherwise be spent on private sector investment (the I variable in the GDP formula).

Money used to finance the deficit is money that would otherwise have been borrowed and spent by corporations and businesses on private investment. Deficit spending by the government is said to crowd out private investment. Crowding out is the offsetting effect on private expenditures caused by the government’s sale of bonds to finance the deficit. The larger the deficit and the more government needs to spend on financing that deficit, the more crowding out occurs.

The crowding out effect, which is one of the most important concepts in macroeconomics, is illustrated below.

The initial equilibrium is at Y, where the aggregate expenditure curve AE, crosses the aggregate production curve AP. However, expansionary fiscal policy shifts the aggregated expenditure curve up to AE1. This leads to a new equilibrium of Y1. However, because the government has had to borrow money from the private capital markets to finance these expenditures, interest rates rise. This reduces investment and a resulting contractionary effect shifts the aggregate expenditure curve back down from AE1 to AE2.

The final equilibrium is now at Y2 as the net economic expansion equals Y2 minus Y. At the same time, the partial crowding out of private investment may be measured by Y1 minus Y2. The level of partial crowding out rises the more government borrows from the private sector.

It is my opinion that government deficits are a weak fiscal policy tool at best, and I think the last eight years of President Obama increasing the national debt and running the largest deficits in US history has proven that point.

A few readers have asked me if crowding out can be reduced by printing money. The idea is to avoid crowding out by printing money and here is how that scheme works. The Federal Reserve accommodates the Treasury’s expansionary fiscal policy by buying Treasury’s securities itself rather than letting the securities be sold in the open capital markets. In essence, the Federal Reserve simply prints new money.

The problem with this option is that the increase in the money supply can cause inflation. Moreover, if such inflation drives interest rates up and private investment down, as it is likely to do, the result of the print money option will be a crowding out effect as well. In other words, there is no escaping the crowding out effect when it comes to financing the deficit. Again, look at the last eight years of President Obama and look out how much he has put this country in debt and ask yourself has it really benefited the U.S. economy that much? Perhaps some, but ultimately crowding out took away much of the initial gains from Democrat’s expansionary fiscal policy.

Deficits Impact On International Trade

Deficits and a rising government debt is a serious threat to the US. Chronic budget deficits have not only been responsible for crowding out private investment, but also for America’s huge trade deficits over the last several decades. The macroeconomic relationship between deficits and international trade is illustrated below.

As government deficits drive interest rates up in boxes 1 and 2, we observe crowding out in box 3. Now look at box 4. Higher US interest rates attract foreign investors but, for these investors to invest, they must exchange their foreign currencies for dollars. This not only leads to an increase of US external debt in box 5, but it also drives up the value of the dollar in box 6. A stronger U.S. dollar makes U.S. exports less competitive, and exports decrease in box 7 even as imports increase in box 8. The result is a larger trade deficit in box 9, and that’s why economists refer to budget and trade deficits as the “twin deficits.”

A trade deficit means a country is not exporting enough to pay for its imports. The difference can be paid by either borrowing from abroad or by selling US assets.

Mortgaging America

To finance its trade deficit, the US has had to sell off assets such as factories, shopping centers, hotels, golf courses, and farms to foreign investors. This mortgaging of America has reduced both the rate of economic growth and the level of real income of Americans.

Deficit Doves Say Don’t Worry

Deficit dove economists that work for Democrats and the Obama Administration say don’t worry about the national debt because most of that debt is internal debt owned by the country to its citizens. Obviously, that argument by Democrat economists is not so good as evidenced by the broken US economy some eight years after Democrats and Obama took office. I list four reasons below why this “don’t worry be happy” argument is wrong and how it has hurt the US economy.

#1: Internal Debt Leads to Higher Taxes

Internal debt requires payments of interest to bondholders. This, in turn, means higher taxes which distort the allocation of national resources and lead to an efficiency loss.

#2: Internal Debt Redistributes Income From Poor To Rich

Paying interest on the internal debt unfairly redistributes income from the poor and middle class to the rich. This happens because government bondholders as a group tend to be wealthier than taxpayers as a group.

#3: Servicing The Debt Cuts Government Services

Paying interest on the debt uses $482 billion each year, and this money could otherwise be spent on providing taxpayers with more education, health care, and other government services. The size of the interest payments to service the debt, relative to total tax revenues, has been rising every year. If nothing is done, we will eventually wind up using all available tax revenues simply to service the debt.

#4: A Burden On Future Generations

The accumulation of such a large debt places an unreasonable burden on future generations, which must pay this debt off. I don’t know what to even tell my daughters about the $19.5 trillion national debt, so I choose to say nothing. I could say I voted for Obama because I wanted to vote for the first African-American President and I thought he would save our household money on medical care. Then say, oops, my bad, now here’s the $9 trillion he added to the national debt during his Presidency that you have to pay off when you’re old enough to work. Thank you and have a nice day.

Niall Ferguson thinks that the “age of debt” is coming to an end. Apologies for the sub-titles but this Hard Talk interview has an important message.

With a growing crowding out effect, it may be impossible to increase GDP in a meaningful way until the national debt and deficit spending is reduced.

Warning Sign: US Auto Loan Delinquencies Rising

There is $1.103 trillion in outstanding auto loan debt in the US which is the highest level ever recorded.

We know that the economy has been slowing for a few years now so how could so many people still be taking out auto loans? If we overlay auto sales and auto loan debt, we learn that more people are not taking out more auto loans, at least not since August of 2014.

Auto sales peaked in August of 2014. In 2015, car sales chopped out and slowly faded down; however, in 2016 we’ve seen a rapid plunge. What explains rising auto loan balances as car sales are falling is rising delinquencies.

As of Q2 2016, there was about $21 billion in auto loans delinquent by 30 days. The delinquencies started to rise in Q1 2015 as evidenced by the auto loans delinquent by 90 days (red line) in the chart below.

If we zoom out the chart, we can see that auto loan delinquencies rise right before a recession.

Oil and Gas Company Default Rates Surge Higher

Watch out for investing in high yield corporate debt. U.S. default rates are surging higher and breaking away from the rest of the world.

The U.S. has more oil and gas firms that are financed by the high yield bond market than anywhere else on the planet. The S&P calls these oil and gas companies the “weakest links.”

Accommodative Federal Reserve policy (ultra-low interest rates and lower lending standards) caused a lot of borrowing by smaller oil and gas companies profiting from the shale oil boom. When the price of oil crashed, S&P downgraded the credit rating on lots of that debt to B- and lower.

Now you see why many oil and gas executives are using the mainstream financial media to disseminate fantastic stories of oil production cuts by OPEC members. The goal is to jawbone the price of oil higher. No one is going to cut production when oil prices are this low because they have to produce more to make up for the budget shortfalls caused by the lower price of oil. Remember the law of man: when things get bad enough, it’s every man/country for himself.

Traders Remember David Hume, It’s Not All Yellen

I’ve been asking traders what causes low-interest rates. The consensus is that the Federal Reserve is what causes low-interest rates. That is not entirely true and believing that could be harmful to your trading account.

Some 250 years ago, David Hume was the very first economist to explain what causes low-interest rates.

The three things that cause low-interest rates are:

1. Small demand for borrowing
2. Great riches to supply that demand
3. Small profits arising from commerce

In other words, the most important things that cause low-interest rates are factors going on in the economy. It’s the weak economy that is most responsible for why we have low-interest rates. While this may seem like common sense to some of you, I was surprised by how many traders were more focused on monetary policy than on macroeconomics.