Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
YouGov's MRP Poll Final Tory Seats Forecast Revised Down From 359 to 338, Possibly Lower? - 10th Dec 19
What UK Economy (Average Earnings) Predicts for General Election Results 2019 - 10th Dec 19
Labour vs Tory Manifesto's UK General Election Parliamentary Seats Forecast 2019 - 10th Dec 19
Lumber is about to rally and how to play it with this ETF - 10th Dec 19
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19
Will Labour Government Plant More Tree's than Council's Like Sheffield Fell? - 4th Dec 19
What the UK Economy GDP Growth Rate Predicts for General Election 2019 - 4th Dec 19
Gold, Silver and Stock Market Big Picture: Seat Belts Tightened - 4th Dec 19
Online Presence: What You Need to Know About What Others Know About You - 4th Dec 19
New Company Tip: How To Turn Prospects into Customers with CRM Tech - 4th Dec 19
About To Relive The 2007 US Housing Market Real Estate Crash Again? - 3rd Dec 19
How Far Will Gold Reach Before the Upcoming Reversal? - 3rd Dec 19
Is The Current Stock Market Rally A True Valuation Rally or Euphoria? - 3rd Dec 19
Why Shale Oil Not Viable at $45WTI Anymore, OPEC Can Dictate Price Again - 3rd Dec 19
Lib Dem Election Dodgy Leaflets - Sheffield Hallam Battle General Election 2019 - 3rd Dec 19
Land Rover Discovery Sport Brake Pads Uneven Wear Dash Warning Message at 2mm Mark - 3rd Dec 19
The Rise and Evolution of Bitcoin - 3rd Dec 19
Virtual games and sport, which has one related to the other - 3rd Dec 19

Market Oracle FREE Newsletter

UK House prices predicting general election result

Dangerous Debt Trend And What It Could Do to Your Wealth

Interest-Rates / Global Financial System Jun 01, 2015 - 05:50 AM GMT

By: Investment_U


Andrew Snyder writes: It is a fascinating trend - something every investor must be aware of. It’s yet another reason interest rates are likely to stay lower for far longer than most folks ever expected.

If rates rise, after all, countless governments are in big trouble.

Everywhere we look, return-desperate investors are turning to the debt market and its virtually free money. It’s one thing when companies use borrowed money to buy their own shares. It’s a victimless crime.

But when governments use a similar trick to artificially lower their pension burden, we’re all at great risk.

If you pay attention to the political news, you may have heard of pension obligation bonds (POBs). They’re a dangerously popular tool governments have turned to as the half-cocked answer to their problems.

They borrow money from the debt market and turn around and put it in the stock market. Think of it as an arbitrage play. The spread between the debt and the return from the stock market (if things work out) is profit.

On paper, it can temporarily erase a city’s or state’s pension deficit. In reality, it’s incredibly dangerous. If this sort of arbitrage actually worked, the whole world would be rich.

Proving the point, a recent study looked at nearly 300 pension obligation bonds and found that, like ordinary investors, most governments were borrowing and investing when the market was at its peak... virtually guaranteeing losses, making their fiscal problems worse.

Average Internal Rate of Return on Pension Obligation Bonds chart

That was certainly the case in Detroit, where the government borrowed billions in the high-flying years leading up to the 2008 meltdown. The scheme is what ultimately helped push the city into bankruptcy, after a $1.44 billion POB deal ended up becoming a $2.8 billion liability as its credit rating sank.

Further south, Puerto Rico is facing its own fiscal mess. Earlier this month, billions of dollars’ worth of its POBs traded for a mere $0.37 on the dollar. Most of those bonds, sadly, are owned by the citizens of the American territory.

If their government can’t make good on its debt... they lose.

It blows our mind, but despite Detroit’s and Puerto Rico’s horrible experience with pension obligation bonds, states are lining up to take advantage of low rates by launching a Ponzi scheme of their own.

Pension Obligation Bonds Issued 1985-2013 chart

Pennsylvania - my home state - made news this week when its rookie governor unveiled his idea to issue $3 billion worth of debt. Kansas just approved a billion bucks worth of POB debt. Connecticut borrowed $125 million and the Atlanta school district has plans to borrow $400 million to cover pensions for bus drivers and cafeteria workers.

Again, on paper, the idea can work... as long as money stays cheap and stocks keep rising.

But let’s not forget Yellen is busy talking herself into a corner. She’s virtually forced the Fed to raise its key rate over the next nine months. If she pushes rates higher, though, by any material amount, the free-money stock market bonanza will be over. The ticker-tape confetti will stop falling from the sky.

When it does, countless cities, states and school districts will suddenly see their schemes fall apart.

Frankly, it’s an unaffordable risk. Yellen and her monetary maestros at the Fed know it.

They know they created an addiction. They know they are now in control of far more than just inflation and employment levels.

Right now, they control the fate of our economy.

What’s most frightening, though, is they aren’t alone. Central banks across the planet are in the same situation. Case in point... the situation in Greece. Cheap money is the country’s only saving grace. If the European Central Bank reverses course, Greece sinks even faster.

It’s the same story in China, Japan and England.

As an investor, you absolutely need to be aware of this trend. We often talk about the idea of financial education. But don’t be mistaken. We’re talking about far more than the ability to read a balance sheet or understanding the key metrics.

That’s vital knowledge... but you can learn it anywhere. Instead, we urge you to learn how to connect the dots, how to uncover the unspoken trends and see the truth behind the headlines.

What’s happening across the globe is not good. Debt is a dangerous tool. But if you’re informed about what’s going on and what it means, you can avoid the fallout.

Understand our leaders are addicted to debt. Know what’s happening... and what it means for your wealth.

I am flat-out convinced this trend - the planet’s addiction to cheap money - will keep interest rates in artificially low territory for far longer than most folks think.

As we’ve seen over the last five years, that’s good news for stocks.

Good investing,



Copyright © 1999 - 2015 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email:

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 - 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