Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Interest Rate Doves Don't Know History

Interest-Rates / US Interest Rates Sep 22, 2014 - 02:13 PM GMT

By: Michael_Pento

Interest-Rates

A wise saying goes like this; "Those who do not remember history are condemned to repeat it." So ask yourself; what is the fate of those who seem to have absolutely no recollection of events that happened just a few years ago?

We are nearing the end of 2014, and to the debt markets, it is almost as if the 2008 economic collapse never happened. It appears that borrowers and lenders are suffering from a severe case of collective amnesia. Yes, consumer debt levels took a slight breather in 2009-10. But today, total consumer credit in the U.S. has risen by 22 percent over the past three years, and at this point 56 percent of all Americans have a subprime credit rating.


By the end of 2014, total U.S. credit card debt is expected to rise by $54.8 billion and average household credit card debt will surpass the $7,000 mark, reaching levels not witnessed since the end of 2010. Adding to these disturbing figures is student loan debt that is at a nationwide all-time record of $1.2 trillion, which is an 84 percent jump since the Great Recession of 2008. Almost 19 percent of student loan borrowers owe more than $50,000, according to a report published recently by the Federal Reserve. Only 6 percent of borrowers had that much debt in 2001. Student loan debt now outstrips credit card and auto loan debt in America. And speaking of auto loan debt, during the first quarter of this year, the size of the average vehicle loan soared to a new all-time record high of $27,612. Five years ago, that number was just $24,174.

The financial crisis of 2008 was born out of a romance between the US consumers' insatiable desire to spend and financial institutions' voracious desire to issue debt, which compelled them to lend money regardless of the other party's ability to make payments. In 2008, this dysfunctional relationship ended badly and both parties swore each other off. But, with the Fed in the background playing the violin, recent data shows today, these two lovebirds can't stay away from each other.

Unfortunately, todays mounting debt isn't limited to the US consumer, Bank of America is forecasting about $110 billion of collateralized loan obligations for 2014, as volume is on pace for a record year. CLO's are used to finance small and medium size businesses. And CLO issuance in total, is on pace to surpass the record $93 billion raised in the U.S. during 2007.

Adding fuel to the debt fire is the aggressively growing Junk bond market. Junk bond yields have fallen to the 5-6 percent range. This has caused fund managers, still insisting on a 10%+ return, to buy on leverage in order to increase the yield on their capital investment. Citigroup, displaying a pre-2008 mindset, has even calculated that leveraging junk bonds at 2.3X is a better trade than leveraging US Treasuries at 8.1X.

All these data points prove that we, as a nation of borrowers, have learned nothing from 2008. In fact, things have gotten worse as our own Federal Government, lulled by record low interest rates, has massively stepped up its own passion for debt, taking Federal Debt levels up from $9.2 trillion, at the start of 2008, to $17.8 trillion today. But the tease is that with record low interest rates, they are actually paying less today to service that debt then they were 6 years ago.

This is in part because the Treasury insists on financing debt at the shortest duration possible. In fact, about 80 percent of the government's $12.8 trillion publicly traded debt is financed with shorter-term Bills and Notes. And thanks to the Fed's ZIRP and Treasury's short-term thinking, the average interest rate on the government's marketable debt was less than 2 percent last year. Compare that to the 6.6 percent level in January of 2000, when interest rates were still below their forty-year average.

It's clear that simply reinforcing bad behavior of the past has left few to learn from previous transgressions. The past six years of record low interest rates, should have given borrowers a reprieve; an opportunity to refinance debt and get their financial house in order. Instead, it has predictably lured, first the public, and now private sector borrowers, to pile on more debt. Indeed, the aggregate level of U.S. debt now stands at a record $57 trillion! That figure is up nearly $7 trillion from the Great Recession.

Therefore, those investors who believe the Fed can seamlessly transition from 6 years of ZIRP and $3.7 trillion in QE should re-read the above data. An aggressive Fed will immediately cause our overleveraged and asset bubble-driven economy to collapse. It's just a shame the Dole of Doves at the Fed never learned from previous mistakes -- even those made just a few years ago.

This is why the Federal Reserve will not be raising rates anytime soon. And why Ms. Yellen kept the language in last week's FOMC statement regarding, "considerable time" between the end of QE and the first rate hike.

Those investors piling into the U.S. dollar based on a hawkish Fed are making a big mistake. Our central bank wants to create an environment of perpetual inflation. And will not end its policy of providing negative real interest rates until thoroughly successful.

Since the Greenspan era, history has taught us that our dovish Fed exists to accommodate government borrowing. This truth is becoming more immutable as debt levels inexorably increase. Unfortunately, this codependent relationship has now caused the latest iteration of a stock market bubble to become the most dangerous of them all.

Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2014 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules