A Lesson from Grandpa
The market fell apart yesterday, but, lest we forget, things can certainly change on a dime. There was no single news story that drove panic into the market. Some of the media blamed data that came out of China, others blamed the Ukrainian situation, and others blamed Marc Faber who called for a correction. I am not sure what the single catalyst event was, but when the buyers stepped away and the bids got thin (“liquidity”), the market fell sharply and didn’t see a rebound. Most of the indices got to those support levels, a few fell through them. Perhaps there are some last minute jitters heading into next week’s FOMC meeting and concerns that Yellen will keep tapering or even raise rates. Who knows, but there is are underlying misgivings in the market.
A Lesson from Grandpa
What will give the next jolt to the markets? Will it be economic data out of China, the problems in the Ukraine, domestic economic data, the pot boiling over again in Europe economic bailouts, or perhaps volatility in the Middle East?
Today is no different than 10 years ago or even 50 years ago. There is and will always be volatile situations in the world and we will deal with them as they come, suffer some volatility and move on. However, what IS different today is massive government economic intervention. The US and the West don’t have any room on their balance sheet to deal with the upcoming crisis, not without adding more debt.
Debt is the problem!
My grandfather once told me, “A man in debt is unable to maneuver.” This was almost 30 years ago and he was referring to mortgages. He was trying to make the point that your house is your home, you pay off your mortgage as fast as you can and you don’t borrow against your HOME. You want to invest in real-estate, buy a rental home and rent it out. It was certainly an important lesson that most of Americans forgot about during the housing boom and look where that left us. But I bring up his quote and advice because it doesn’t just pertain to individuals, it also pertains to business and, more importantly, to governments.
“Socialism works until you run out of other people’s money.” – Margaret Thatcher
During the Great Depression, FDR had such a tremendous amount of room on his balance sheet, as well as the nation being a net exporter (our nation was loaded with resources and manufacturing), that he could push forth a wide variety of social “New Deal” programs. You may disagree with the New Deal, socialism, and FDR’s policies, but we can’t deny that he had the fiscal, economic and resource room to implement it. Today our nation is a net IMPORT nation. It is burdened with massive amounts of public/private debt, which means that any new social program or government intervention will be stalled before it even starts. Our nation is in debt to the tune of $16 TRILLLION and is adding on about $1 trillion a year. We are so far in debt that our government can’t even legitimately raise money through selling bonds without the help of the Fed’s money printing. To slightly change my grandfather’s saying, “A government in debt is unable to maneuver”. Think about this for a second, the Fed prints $65 billion a month to buy government bonds, over $20 billion of that deficit spending per month is spent on INTEREST on existing debt. That means 30% of our deficit spending is just to pay interest. We are borrowing more money to pay interest. I wrote an essay predicting GM’s failure back in 2007 because that was the year they started borrowing money just to pay interest on borrowed money (debt). A man, business, or government in debt can’t maneuver.
Courtesy of Sons of Liberty trees
Socialism’s Slippery Slope
I bring this up because traditionally, as our nation has faced geopolitical, natural disasters, war, and economic turbulence, we had the ability to quickly deal with these issues. I am not going to debate the merits of our government’s actions, but rather point out that we did have the ability to deal with these issues from a financial basis without stressing economic conditions.
Obama is not solely at fault. The two wars in the Middle East (rightly or wrongly) drained our coffers, added debt and drained resources. However, it was the recent Great Recession that brought the US and other Western nations to their knees. A politician’s currency is votes and those who won elections are those that offered any kind of bailout and social programs. The Nanny State and socialism was quickly on the rise. The problem was that losses were not realized, they were just moved from the private sector over to the public sector. GM, AIG, Freddie, Fannie, Bank of America, GE Capital, Citigroup, and many others were given a free pass as the government bailed them out and, in some cases, moved losses from the private sector onto the government’s books. Again, I am not going to debate whether this was the right or wrong thing to do, or whether it saved our economy; however, we can’t ignore and now can’t avoid that fact that massive amounts of debt are now burdening our government.
Once the door of socialism opens and people ask not what THEY can do for their country, but what their country can do for them, it is hard to shut. Obamacare is been sold to the American public as “Free” healthcare, but it is far from free as it is subsidized by tax payer dollars. Even the bi-partisan, Congressional Budget Office has restated how much they underestimated the cost to our government (the taxpayers). Senator Elizabeth Warren is pushing forward new legislation to turn our bankrupt Post Office into a bank for Payday loans and low interest rate loans to the poor, of course, at the risk of more government debt. The talk of winding down Freddie and Fannie has been met with suggestions of a new government mortgage agency. Remember, home ownership is a “Right”! If the government keeps robbing Peter to pay Paul, the government can continue to rely on Paul’s support (vote). Add in failures of Solyendra and the 100′s of millions of dollors in other failed investments and it only adds to the debt. Meanwhile, the Keystone XL has not started, which is a private sector project that would create jobs. One only has to look at North Dakota to see the job boom that energy independence and growth can bring. The problem is we have run out of cash, we are running trillion dollar deficits and the Fed is printing the money for the government to deficit spend, because NO ONE will lend to the US.
Can we deal with geopolitical issues?
All this means is that our nation is handcuffed, limiting the ability to tackle and deal with issues as they arise. We have fallen back on tough talk against Russia on the Ukraine issue. However, what the Ukraine NEEDS is a bailout. Remember, that’s what started this whole thing. Are we to write the Ukraine a check for the billions they are asking for? It certainly seems so and then when our government raises our taxes again, you can think about the billions we have given to Egypt, Pakistan, and dozens of other countries (buying their allegiance, masked as aid). Is the Ukraine now going to line-up for a handout? We are like the world’s rich uncle just handing out BILLIONS to these nations and they just line-up for more, most of them have no interest in our values, our democracy, or even being our friends. But the fact remains, we have NO MONEY, only debt and to give these nations billions more the Fed will have to print billions more, which will add to our debt.
The US treasury (bond) market is being artificially propped up by the Fed through both a zero interest rate policy and the majority buyer of US treasury bonds. They have to keep rates at zero for new borrowing because the government can’t afford to pay interest on their existing debt. Remember, they are already borrowing to pay interest on the debt ($20 billion a month). So we have a bond bubble and that trickles over to a dollar bubble.
Keep the Faith and all we have is Hope for some REAL Change.
The dollar has a lot a faith, so it has to be something massive to bring the dollar down. China is not willing to trade in US dollars, oil repriced in another currency (or mixed basket), a liquidation of US treasuries, or a general loss of faith. At some point faith will erode as the world becomes ever more acutely aware that the US government is just piling on the debt as the Fed prints money and the government can’t even pay its own bills.
Fed to the rescue?
So it will not be Ukraine, China, the Middle East or some other event that is the direct cause of a problem that drives volatility into our market, it is massive debt and our inability to maneuver in an efficient manner to address the problems as they arise.
It burns me to say this, but China and Russia have the upper hand on the US, purely from a government debt/economic standpoint.
This all circles back to the FOMC meeting next week and what will they do. They are the funder of last resort, are printing money to pay for our government’s interest on the debt, and are effectively keeping the US solvent. I don’t know how the Fed will unwind their “extraordinary effort” nor do I know when the bubble will burst, but I do know that it is a mathematical inevitability that this money printing and debt accumulation will end. Of course, I could always take the Lord Maynard Keynes (father of Keynesian Economics and also the economic theory that Yellen preaches) approach: debt doesn’t matter because we are all dead in the long-run. That worked for him and has worked so far, should I really care about the future solvency of our nation?
Support & Resistance
Could we get a bounce from here? The futures are flat this morning, but with the volatility on the horizon and the trepidation of investors we could see volatility before the next FOMC meeting.
We pulled right back to that level and I wonder if this is support in which we can bounce or do we fall down to 3550?
The SPX also fell right to that support level and the pre-market futures look flat. The VIX popped and spiked above 16. Today we will see if anyone wants hold on into the weekend.
Again another big support and we must continue to watch closely to see if this is a support in which we bounce or if we wait.
The Crimea Referendum is this Sunday. Obama has talked tough and met with the newly installed Ukraine PM, thumbing his nose at Putin and daring Russia to do something. Obama has said there will be “consequences” if Crimea joins Russia. But what is he actually going to do? The US is not a major and direct trader with Russia. The European Union is not excited about sanctions or an embargo against Russia, because they rely on Russia oil and gas, so it hurts the EU and you know the people will freak-out if oil/gas prices go up. Are we going to use force? I don’t think so.
I wonder if we will see some selling pressure into the close because no one wants to hold risk into a weekend in which Obama threaten consequences against Russia if the Crimea Referendum goes through.
Could be a volatile Monday.