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Is It Just A Coincidence That The Dow Has Hit 20,000 At The Same Time The National Debt Is Reaching $20 Trillion?

Dow Fueled By DebtThe Dow Jones Industrial Average provides us with some pretty strong evidence that our “stock market boom” has been fueled by debt.  On Wednesday, the Dow crossed the 20,000 mark for the first time ever, and this comes at a time when the U.S. national debt is right on the verge of hitting 20 trillion dollars.  Is this just a coincidence?  As you will see, there has been a very close correlation between the national debt and the Dow Jones Industrial Average for a very long time.

For example, when Ronald Reagan took office in 1991, the U.S. national debt had just hit 994 billion dollars and the Dow was sitting at 951.  And as you can see from this chart by Matterhorn.gold via David Stockman, roughly that same ratio has held true throughout subsequent presidential administrations…

Dow Fueled By Debt

During the Clinton years the Dow raced out ahead of the national debt, but an “adjustment” during the Bush years brought things back into line.

The cold hard truth is that we have been living way above our means for decades.  Our “prosperity” has been fueled by the greatest debt binge in the history of the world, and we are greatly fooling ourselves if we think otherwise.

We would never have gotten to 20,000 on the Dow if Barack Obama and Congress had not gotten us into an extra 9.3 trillion dollars of debt over the past eight years.

Unfortunately, most people do not understand this, and the mainstream media is treating “Dow 20,000″ as if it is some sort of great historical achievement

The average began tracking the most powerful corporate stocks in 1896, and has served as a broad measure of the market’s health through 22 presidents, 22 recessions, a Great Depression, at least two crashes and innumerable rallies, corrections, bull and bear markets. The blue chip reading finally cracked the 20,000 benchmark for the first time early Wednesday.

During the current bull market, the second longest in history, the Dow has more than tripled since March 2009.

Since Donald Trump’s surprise election victory, the Dow has now climbed by approximately 2150 points.

And it took just 64 calendar days for the Dow to go from 19,000 to 20,000.  That is an astounding pace, and financial markets around the rest of the planet are doing very well right now too.  In fact, global stocks rose to a 19 month high on Wednesday.

So where do we go from here?

Well, if Donald Trump wants to see Dow 30,000 during his presidency, then history tells us that he needs to take us to 30 trillion dollars in debt.

Of course that would be absolute insanity even if it was somehow possible.  Each additional dollar of debt destroys the future of our country just a little bit more, and at some point this colossal bubble is going to burst.

But you can’t tell most of the “financial experts” these things.  Most of them simply believe that the “market always goes higher over time”

The “market always goes higher over time,” Todd Morgan, chairman of Bel Air Investment Advisors. “The lesson here is that through wars, recessions, elections, impeachments, financial crises, and on and on, investing for the long term in high-quality stocks is the key to building wealth. … We are telling our clients that you can’t time the market. Think long term. Stay the course. We expect the market to see Dow 30,000 in my lifetime, and for my grandchildren to see Dow 50,000 in their lifetime.”

My hope is that the market will continue to go up.  But nobody can deny that valuations are already at absurdly high levels, and the only way that this party can keep going is to continue to fuel it with more and more debt.

But for the moment, there is a tremendous amount of optimism out there, and most experts expect the Dow to continue to set new highs.  In fact, CNBC says that whenever the Dow crosses a new threshold like this it usually means good things for investors…

CNBC looked at market data from the past 30 years and zeroed in on the times when the Dow has crossed levels like 2,000, 3,000, 4,000 … all the way up to the 19,000 level it hit in November. At those times, investors can typically expect traders to push it up even higher, according to data from Kensho. Not only does the Dow go up, but it outperforms the S&P 500 index along the way.

But as USA Today has explained, not all Americans are benefiting from this stock market rally…

The breakthrough came just four trading days into Trump’s presidency, a whirlwind in which the billionaire has reaffirmed his commitment to strengthen the U.S. economy and create more jobs and higher wages for workers. Still, nearly half of Americans have not benefited from the so-called “Trump Rally,” which has generated more than $2.2 trillion in paper gains for the Wilshire 5000 Total Stock Index since Election Day. The reason: only 52% of Americans polled by Gallup last April said they “have money invested in stocks” — the lowest stock ownership rate in the 19 years Gallup has tracked the data and down sharply from 65% in 2007 before the financial crisis.

Hopefully the good times will continue to roll for as long as possible.

But there is no possible way that they can keep going indefinitely.

For decades, our debt has been growing much faster than our GDP has.  By definition, this is an unsustainable situation.  At some point we will have accumulated so much debt that our financial system will no longer be able to hold up under the strain.

Many were convinced that we would reach that point before the U.S. national debt hit 20 trillion dollars, and yet here we are.

So how much higher can we go before the bubble bursts?

That is a very good question, and I don’t know if anyone has the right answer.

But for President Trump, this is going to present him with quite a dilemma.

Either he can keep the debt party going for as long as possible, or he can try to get us to take some tough financial medicine right now.

If an attempt is made to deal with our debt problems now, we will experience severe economic pain almost immediately.

But if the can keeps being kicked down the road, our long-term prognosis is just going to keep getting worse and worse.

And if we try to delay the inevitable indefinitely, at some point the laws of economics are going to make our hard choices for us.

So let us celebrate “Dow 20,000″, but let us also understand that it is far more likely that we will see “Dow 10,000″ again before we ever see “Dow 30,000″.

U.S. Economic Confidence Surges To The Highest Level That Gallup Has Ever Recorded

donald-trump-accepts-the-nomination-public-domainGallup’s U.S. Economic Confidence Index has never been higher than it is today.  The “Trumphoria” that has gripped the nation ever since Donald Trump’s miraculous victory on election night shows no signs of letting up.  Tens of millions of Americans that were deeply troubled by Barack Obama’s policies over the last eight years are feeling optimistic about the future for the first time in a very long time.  And it is hard to blame them, because what we have already seen happen since November 8th is nothing short of extraordinary.  The stock market keeps hitting record high after record high, the U.S. dollar is now the strongest that it has been in 14 years, and CEOs are personally promising Trump that they will bring jobs back to the United States.  These are things worth getting excited about, and so it makes perfect sense that Gallup’s U.S. Economic Confidence Index has now risen to the highest level that Gallup has ever seen

Americans’ confidence in the economy continues to gradually strengthen after last month’s post-election surge. Gallup’s U.S. Economic Confidence Index averaged +10 for the week ending Dec. 18, marking another new high in its nine-year trend.

The latest figure is up slightly from the index’s previous high of +8 recorded in both of the prior two weeks. The first positive double-digit index score since the inception of Gallup Daily tracking in 2008 reflects a stark change in Americans’ confidence in the U.S. economy from the negative views they expressed in most weeks over the past nine years.

And of course this booming level of confidence is not just reflected in Gallup’s numbers.  As I discussed in a previous article, the mammoth shift in the results of CNBC’s All-America Economic Survey after the election was nothing short of historic…

The CNBC All-America Economic Survey for the fourth quarter found that the percentage of Americans who believe the economy will get better in the next year jumped an unprecedented 17 points to 42 percent, compared with before the election. It’s the highest level since President Barack Obama was first elected in 2008.

The surge was powered by Republicans and independents reversing their outlooks. Republicans swung from deeply pessimistic, with just 15 percent saying the economy would improve in the next year, to strongly optimistic, with 74 percent believing in an economic upswing. Optimism among independents doubled but it fell by more than half for Democrats. Just 16 percent think the economy will improve.

On Tuesday, the Dow Jones Industrial Average closed at yet another all-time record high.

That was the 17th record close since election day, and overall the Dow is up a whopping 8 percent during that time span.

I don’t think that we have ever seen an extended post-election stock market rally quite like this one, and the U.S. dollar is rallying too.  On Tuesday, the U.S. dollar was the strongest that it has been in 14 years

The dollar hit a fresh 14-year high on Tuesday, boosted by upbeat comments from Federal Reserve Chair Janet Yellen that kept alive market expectations for swifter U.S. interest rate hikes next year than had been expected.

The greenback climbed broadly but its gains were strongest against the yen, which slid as much as 1 percent after the Bank of Japan kept monetary policy unchanged.

But of course not everything is rainbows and unicorns.  Signs of trouble continue to erupt all over the U.S. economy, and there are many that believe that Trump will be facing some very serious economic concerns very early in his presidency.

Just look at what is happening in the auto industry.  Unsold vehicles are piling up at an alarming pace at dealers all over the nation, and GM just announced that it is going to temporarily close five factories

GM has been reacting to its fabulously ballooning inventory glut by piling incentives on its vehicles. But that hasn’t worked all that well though it cost a lot of money. Now it’s time to get serious.

It will temporarily close five assembly plants in January and lay off over 10,000 employees, spokeswoman Dayna Hart said today.

And GM is definitely not alone.  Back in October, Ford made a similar announcement

In October, Ford announced that it would temporarily shut down production at one of its F-150 assembly plants (Kansas City), along with production at a plant that assembles the Escape and the Lincoln MKC (Louisville), plus two plants in Mexico. It would also lay off about 13,000 workers, 9,000 in the US and 4,000 in Mexico.

Another signal that the economy is slowing down is the tremendous difficulty that Uber is experiencing right now.  If you can believe it, they just announced that they lost a staggering 800 million dollars in the third quarter

Uber racked up pro-forma losses of more than $800m in the third quarter of this year as a price war with rival ride-hailing service Lyft in the US and heavy spending on new initiatives weighed on its figures, according to a person familiar with its recent financial performance, reports The Financial Times.

The third-quarter figures, first reported by tech news site The Information, show that Uber still faces steep losses even after pulling back from China.

I don’t understand how Uber could possibly lose 800 million dollars in three months.  Something is definitely very wrong over there.

Personally, I hope that things go as well as possible during the Trump administration.  If we truly are entering a new golden era of peace and prosperity, that would be more than okay with me.

But we should not forget that our economic fundamentals have continued to deteriorate all throughout the Obama years, and our nation has been steadily accumulating the largest mountain of debt the world has ever seen.

Unless there is some sort of unprecedented miracle, there is no way that this giant bubble that we are in at the moment is going to end well.  So it is definitely good to be optimistic, but we also need to be realistic about where we are right now and about the great challenges that we will soon be facing.

After Raising Rates Once During The Obama Years, The Fed Promises Constant Rate Hikes During The Trump Era

janet-yellen-public-domainNow that Donald Trump has won the election, the Federal Reserve has decided now would be a great time to start raising interest rates and slowing down the economy.  Over the past several decades, the U.S. economy has always slowed down whenever interest rates have been raised significantly, and on Wednesday the Federal Open Market Committee unanimously voted to raise rates by a quarter point.  Stocks immediately started falling, and by the end of the session it was their worst day since October 11th.

The funny thing is that the Federal Reserve could have been raising rates all throughout 2016, but they held off because they didn’t want to hurt Hillary Clinton’s chances of winning the election.

And during Barack Obama’s eight years, there has only been one rate increase the entire time up until this point.

But now that Donald Trump is headed for the White House, the Federal Reserve has decided that now would be a wonderful time to raise interest rates.  In addition to the rate hike on Wednesday, the Fed also announced that it is anticipating that rates will be raised three more times each year through the end of 2019

Fed policymakers are also forecasting three rate increases in 2017, up from two in September, and maintained their projection of three hikes each in 2018 and 2019, according to median estimates. They predict the fed funds rate will be 1.4% at the end of 2017, 2.1% at the end of 2018 and 2.9% at the end of 2019, up from forecasts of 1.1%, 1.9% and 2.6%, respectively, in September. Its long-run rate is expected to be 3%, up slightly from 2.9% previously. The Fed reiterated rate increases will be “gradual.”

So Barack Obama got to enjoy the benefit of having interest rates slammed to the floor throughout his presidency, and now Donald Trump is going to have to fight against the economic drag that constant interest rate hikes will cause.

How is that fair?

As rates rise, ordinary Americans are going to find that mortgage payments are going to go up, car payments are going to go up and credit card bills are going to become much more painful.  The following comes from CNN

Higher interest rates affect millions of Americans, especially if you have a credit card or savings account, or want to buy a home or a car. American savers have earned next to nothing at the bank for years. Now they could be a step closer to earning a little more interest on savings account deposits, even though one rate hike won’t change things overnight.

Rates on car loans and mortgages are also likely to be affected. Those are much more closely tied to the interest on a 10-year U.S. Treasury bond, which has risen rapidly since the election. With a Fed hike coming at a time when interest on the 10-year note is also rising, that won’t help borrowers.

The higher interest rates go, the more painful it will be for the economy.

If you recall, rising rates helped precipitate the financial crisis of 2008.  When interest rates rose it slammed people with adjustable rate mortgages, and suddenly Americans could not afford to buy homes at the same pace they were before.  We have already been watching the early stages of another housing crash start to erupt all over the nation, and rising rates will certainly not help matters.

But why does the Federal Reserve set our interest rates anyway?

We are supposed to be a free market capitalist economy.  So why not let the free market set interest rates?

Many Americans are expecting an economic miracle out of Trump, but the truth is that the Federal Reserve has far more power over the economy than anyone else does.  Trump can try to reduce taxes and tinker with regulations, but the Fed could end up destroying his entire economic program by constantly raising interest rates.

Of course we don’t actually need economic central planners.  The greatest era for economic growth in all of U.S. history came when there was no central bank, and in my article entitled “Why Donald Trump Must Shut Down The Federal Reserve And Start Issuing Debt-Free Money” I explained that Donald Trump must completely overhaul how our system works if he wants any chance of making the U.S. economy great again.

One way that Trump can start exerting influence over the Fed is by nominating the right people to the Federal Open Market Committee.  According to CNN, it looks like Trump will have the opportunity to appoint four people to that committee within his first 18 months…

Two spots on the Fed’s committee are currently open for Trump to nominate. Looking ahead, Fed Chair Janet Yellen’s term ends in January 2018, while Vice Chair Stanley Fischer is up for re-nomination in June 2018.

Within the first 18 months of his presidency, Trump could reappoint four of the 12 people on the Fed’s powerful committee — an unusual amount of influence for any president.

By endlessly manipulating the economy, the Fed has played a major role in creating economic booms and busts.  Since the Fed was created in 1913, there have been 18 distinct recessions or depressions, and now the Fed is setting the stage for another one.

And anyone that tries to claim that the Fed is not political is only fooling themselves.  Everyone knew that they were not going to raise rates during the months leading up to the election, and it was quite clear that this was going to benefit Hillary Clinton.

But now that Donald Trump has won the election, the Fed all of a sudden has decided that the time is perfect to begin a program of consistently raising rates.

If I was Donald Trump, I would be looking to shut down the Federal Reserve as quickly as I could.  The essential functions that the Fed performs could be performed by the Treasury Department, and we would be much better off if the free market determined interest rates instead of some bureaucrats.

Unfortunately, most Americans have come to accept that it is “normal” to have a bunch of unelected, unaccountable central planners running our economic system, and so it is unlikely that we will see any major changes before our economy plunges into yet another Fed-created crisis.

Trumphoria: Americans Are More Optimistic About The Economy Than They Have Been Since Obama’s Win In 2008

donald-trump-accepts-the-nomination-public-domainOptimism about the future of the U.S. economy has not been this strong since Barack Obama’s first presidential election victory in 2008. Donald Trump promised us an economic resurgence, and what is not to like so far? As I discussed earlier this week, stocks are soaring, businesses are already announcing that they are bringing jobs back to the United States, and the U.S. dollar has been lifted to levels that we haven’t seen in many years. Many are referring to this post-election surge as “Trumphoria”, and I think that is quite appropriate. Personally, I couldn’t imagine financial markets behaving this way if Hillary Clinton had won the election. Right now tens of millions of Americans are feeling deeply optimistic about the future for the first time in a very long time, and this is clearly reflected in the results of the most recent CNBC All-America Economic Survey

The CNBC All-America Economic Survey for the fourth quarter found that the percentage of Americans who believe the economy will get better in the next year jumped an unprecedented 17 points to 42 percent, compared with before the election. It’s the highest level since President Barack Obama was first elected in 2008.

The surge was powered by Republicans and independents reversing their outlooks. Republicans swung from deeply pessimistic, with just 15 percent saying the economy would improve in the next year, to strongly optimistic, with 74 percent believing in an economic upswing. Optimism among independents doubled but it fell by more than half for Democrats. Just 16 percent think the economy will improve.

It is funny how our political perspectives so greatly shape our view of the future. Because Trump won, Democrats now have an extremely dismal opinion of where the economy is heading, while Republicans suddenly believe that happy days are here again.

Of course the truth is that the president has far less power to influence the economy than the Federal Reserve does, and so most Americans greatly overestimate what a president can do to alter our economic trajectory.

But for now most Americans (excluding Democrats) are feeling really good about where things are headed. In fact, we just learned that the University of Michigan consumer confidence survey has soared to the highest level that we have seen since 2005.

And of course the financial markets continued to roll onward and upward on Friday. The Dow was up another 142 points, and it is now less than 250 points away from the magic number of 20,000.

I never thought that we would actually get to 20,000, but thanks to “Trumphoria” we may actually get there before the wheels start coming off.

This post-election run has really been unprecedented. The following comes from CNBC

All major indexes have been hitting record highs since the election. In fact, the Dow has notched 14 record closes since then and gains in 20 of the past 24 sessions.

The Dow, S&P 500, and Nasdaq also did something they haven’t done in more than five years: all three rose each day of this trading week. The last time all three rose every day during the same trading week was September 2011.

Wouldn’t it be great if every month during Trump’s presidency was like the last 30 days?

Trump promised that we would start winning so much that we would actually start getting tired of winning, and so far we are off to a tremendous start.

As I discussed yesterday, some of the biggest winners from “Trumphoria” have been the big banks

The shares of Wells Fargo, the most hated bank in America these days, soared 28% over the past 30 days, Citigroup 25%, JP Morgan 26%, Goldman Sachs, which is successfully placing its people inside the Trump administration, 37%.

But is this momentum in the financial markets sustainable?

Of course not.

There are signs of emerging economic trouble all around us. For instance, Sears just announced that it lost 748 million dollars last quarter and that it plans to liquidate even more stores.

How in the world do you lose three-quarters of a billion dollars in a single quarter? If you had employees in every store literally flushing dollar bills down the toilet all day I don’t think you could lose money that quickly.

And the moment that Trump takes office, he may immediately be faced with a major financial crisis in Europe which has been sparked by the meltdown of large Italian banks. The following comes from a Forbes article entitled “Italy’s Banking Crisis Is Nearly Upon Us“…

There is a high degree of probability (approaching 90%, I’d say) that Italy will experience a severe banking crisis in the next few quarters. Perhaps they can stave off the problem for a year, but something will have to be done about the banks.

Unfortunately, it looks like things are about to get very real for Italian banking giant Monte dei Paschi di Siena. According to Reuters, the European Central Bank has turned down their request for more time to raise needed capital…

The European Central Bank has rejected a request by Italy’s Monte dei Paschi di Siena (BMPS.MI) for more time to raise capital, a source said on Friday, a decision that piles pressure on the Rome government to bail out the lender.

Italy’s third-largest bank, and the world’s oldest, had asked for a three-week extension until January 20 to try to wrap up a privately funded, 5 billion euro ($5.3 billion) rescue plan in the face of fresh political uncertainty.

The ECB’s supervisory board turned down the request at a meeting on Friday on the grounds that a delay would be of little use and that it was time for Rome to step in, the source said.

But most Americans have no idea what is unfolding in Europe right now.

As Americans, we tend to be largely oblivious to what is going on in the rest of the world, and at this moment “Trumphoria” has gripped our nation.

It is certainly not wrong to celebrate the fact that we are getting Donald Trump instead of Hillary Clinton, but let us also not lose sight of the fact that we are likely to be facing some tremendous challenges very early in 2017.

Are We Being Set Up For A Crash? Stocks Hit A Level Only Seen During The Bubbles Of 1929, 2000 And 2007

stock-market-overvalued-public-domainWill the financial bubble that has been rapidly growing ever since Donald Trump won the election suddenly be popped once he takes office?  Could it be possible that we are being set up for a horrible financial crash that he will ultimately be blamed for?  Yesterday, I shared my thoughts on the incredible euphoria that we have seen since Donald Trump’s surprise victory on November 8th.  The U.S. dollar has been surging, companies are announcing that they are bringing jobs back to the U.S., and we are witnessing perhaps the greatest post-election stock market rally in Wall Street history.  In fact, the Dow, the Nasdaq and the S&P 500 all set new all-time record highs again on Thursday.  What we are seeing is absolutely unprecedented, and many believe that the good times will continue to roll as we head into 2017.

What has been most surprising to me is how well the stocks of the big Wall Street banks have been doing.  It is no secret that those banks poured a tremendous amount of money into Hillary Clinton’s campaign, and Donald Trump had some tough things to say about them leading up to election day.

So you wouldn’t think that it would be particularly good news for those banks that Trump won the election.  However, we seem to be living in “Bizarro World” at the moment, and in so many ways things are happening exactly the opposite of what we would expect.  Since Trump’s victory, all of the big banking stocks have been skyrocketing

Financial stocks in particular have been on fire. Citigroup (C) and JPMorgan Chase (JPM) are up about 20% since Donald Trump defeated Hillary Clinton — and that makes them laggards!

Morgan Stanley (MS) has gained more than 25%. So has troubled Wells Fargo (WFC), despite the lingering fallout from its fake account scandal. Bank of America (BAC) is up more than 30%.

And so is Goldman Sachs (GS) — the former employer of both Treasury Secretary nominee Steven Mnuchin and Trump chief strategist Steve Bannon.

But are these stock prices justified by the fundamentals?

Of course not, but during times of euphoria the fundamentals never seem to matter much.  Stocks were incredibly overvalued before the election, and now they are ridiculously overvalued.

Earlier today, a CNBC article pointed out that the cyclically-adjusted price to earnings ratio has only been higher than it is today at three points in our history…

“The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.

Newman said even if the market’s earnings increase by 10 percent under Trump’s policies “we’re still dealing with the same picture, overvaluation on a very grand scale.”

And of course a historic stock market crash immediately followed each of those three bubbles.

So are we being set up for a huge crash in early 2017?

There are some out there that believe that this is purposely being orchestrated.  For example, Mike Adams of Natural News believes that the markets “will be deliberately and destructively imploded under President Trump”

Right now, the U.S. stock market is surging, with the Dow leaping toward 20,000, a number rooted in fiscal insanity and delusional expectations. There are no fundamentals that support a 20,000 Dow, but fundamentals have long since ceased to matter in a financial world hyperventilating on debt fumes while hallucinating about utopian economic models that will soon prove to generate fools instead of real wealth.

Today I’m going on the record with a prediction that I’ll offer with near absolute certainty: The rigged markets that now seem to defy gravity will be deliberately and destructively imploded under President Trump for all the obvious reasons. There will be financial chaos like we’ve never seen before: Investors leaping off tall buildings, banks declaring extended “holidays” that freeze transactions, and California pensioners slitting their wrists after they discover their promised pension funds were just vaporized by incompetent bureaucrats.

On the other hand, there are others that believe that Trump is just walking into a very bad situation and that a crash would be inevitable no matter who was president.

History tells us that there is no possible way that stock prices can stay at this irrational level indefinitely.  But for now a wave of optimism is sweeping the nation, and many of those that are caught up in it will get seriously angry with you if you try to inject a dose of reality into the conversation.

But like I said yesterday, let’s hope that the optimists are correct.  A survey that was just taken of 600 business executives found that 62 percent of them were optimistic about the U.S. economy over the next 12 months.

Incredibly, that number was sitting at just 38 percent the previous quarter.

For the moment, business leaders seem to be quite thrilled that we have a business executive in the White House.

Hopefully Donald Trump’s business experience will translate well to his new position.  And it is certainly my hope that he is as successful as possible.

But even during the campaign Trump talked about how stocks were in a giant bubble, and the euphoria that we have seen since his election victory has just made that bubble even larger.

Throughout U.S. history, every giant financial bubble has always ended very badly, and this time around will not be any exception.

Trump may get the blame for it when it bursts, but the truth is that the conditions for the coming crisis have been building for a very, very long time.

We Are Being Set Up For Higher Interest Rates, A Major Recession And A Giant Stock Market Crash

bear-market-bull-market-public-domainSince Donald Trump’s victory on election night we have seen the worst bond crash in 15 years.  Global bond investors have seen trillions of dollars of wealth wiped out since November 8th, and analysts are warning of another tough week ahead.  The general consensus in the investing community is that a Trump administration will mean much higher inflation, and as a result investors are already starting to demand higher interest rates.  Unfortunately for all of us, history has shown that higher interest rates always cause an economic slowdown.  And this makes perfect sense, because economic activity naturally slows down when it becomes more expensive to borrow money.  The Obama administration had already set up the next president for a major recession anyway, but now this bond crash threatens to bring it on sooner rather than later.

For those that are not familiar with the bond market, when yields go up bond prices go down.  And when bond prices go down, that is bad news for economic growth.

So we generally don’t want yields to go up.

Unfortunately, yields have been absolutely soaring over the past couple of weeks, and the yield on 10 year Treasury notes has now jumped “one full percentage point since July”

The 10-year Treasury yield jumped to 2.36% in late trading on Friday, the highest since December 2015, up 66 basis point since the election, and up one full percentage point since July!

The 10-year yield is at a critical juncture. In terms of reality, the first thing that might happen is a rate increase by the Fed in December, after a year of flip-flopping. A slew of post-election pronouncements by Fed heads – including Yellen’s “relatively soon” – have pushed the odds of a rate hike to 98%.

As I noted the other day, so many things in our financial system are tied to yields on U.S. Treasury notes.  Just look at what is happening to mortgages.  As Wolf Richter has noted, the average rate on 30 year mortgages is shooting into the stratosphere…

The carnage in bonds has consequences. The average interest rate of the a conforming 30-year fixed mortgage as of Friday was quoted at 4.125% for top credit scores. That’s up about 0.5 percentage point from just before the election, according to Mortgage News Daily. It put the month “on a short list of 4 worst months in more than a decade.”

If mortgage rates continue to shoot higher, there will be another housing crash.

Rates on auto loans, credit cards and student loans will also be affected.  Throughout our economic system it will become much more costly to borrow money, and that will inevitably slow the overall economy down.

Why bond investors are so on edge these days is because of statements such as this one from Steve Bannon

In a nascent administration that seems, at best, random in its beliefs, Bannon can seem to be not just a focused voice, but almost a messianic one:

“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.”

Steve Bannon is going to be one of the most influential voices in the new Trump administration, and he is absolutely determined to get this “trillion dollar infrastructure plan” through Congress.

And that is going to mean a lot more borrowing and a lot more spending for a government that is already on pace to add 2.4 trillion dollars to the national debt this fiscal year.

Sadly, all of this comes at a time when the U.S. economy is already starting to show significant signs of slowing down.  It is being projected that we will see a sixth straight decline in year-over-year earnings for the S&P 500, and industrial production has now contracted for 14 months in a row.

The truth is that the economy has been barely treading water for quite some time now, and it isn’t going to take much to push us over the edge.  The following comes from Lance Roberts

With an economy running at below 2%, consumers already heavily indebted, wage growth weak for the bulk of American’s, there is not a lot of wiggle room for policy mistakes.

Combine weak economics with higher interest rates, which negatively impacts consumption, and a stronger dollar, which weighs on exports, and you have a real potential of a recession occurring sooner rather than later.

Yes, the stock market soared immediately following Trump’s election, but it wasn’t because economic conditions actually improved.

If you look at history, a stock market crash almost always follows a major bond crash.  So if bond prices keep declining rapidly that is going to be a very ominous sign for stock traders.

And history has also shown us that no bull market can survive a major recession.  If the economy suffers a major downturn early in the Trump administration, it is inevitable that stock prices will follow.

The waning days of the Obama administration have set us up perfectly for higher interest rates, a major recession and a giant stock market crash.

Of course any problems that occur after January 20th, 2017 will be blamed on Trump, but the truth is that Obama will be far more responsible for what happens than Trump will be.

Right now so many people have been lulled into a sense of complacency because Donald Trump won the election.

That is an enormous mistake.

A shaking has already begun in the financial world, and this shaking could easily become an avalanche.

Now is not a time to party.  Rather, it is time to batten down the hatches and to prepare for very rough seas ahead.

All of the things that so many experts warned were coming may have been delayed slightly, but without a doubt they are still on the way.

So get prepared while you still can, because time is running out.

The Election Of Donald Trump Is Already Having An Enormous Impact On The Economy

donald-trump-and-barack-obama-in-the-oval-office-public-domainThe election of Donald Trump has sent shockwaves through the U.S. economy and the U.S. financial system.  Since November 8th, the Dow has hit a brand new all-time record high, the U.S. dollar has strengthened greatly, and bank stocks are way up.  But not all of the economic news is good news.  Unlike stocks, bonds have reacted very negatively to Trump’s election victory.  The past week has been an absolute bloodbath for bond traders, and as you will see below this is going to have dramatic implications for all U.S. consumers moving forward.

Over just a two day period, more than a trillion dollars was wiped out as bond yields spiked all over the globe.  As CNN has noted, this type of “violent reaction” in the bond market has only happened three other times within the past ten years…

The rate on 10-year Treasury notes has surged to 2.3%, from 1.77% before the election. Last week’s spike in Treasury rates was so big, that it had only happened three times before in the last decade.

BlackRock’s Russ Koesterich called it a “violent reaction.”

The move stands to have broad repercussions for all Americans. Not only will the U.S. government have to pay more to borrow money, but mortgage rates and car loan costs should also rise. That’s because Treasuries are used as the benchmark for many other forms of credit.

As interest rates rise, virtually everyone in our society is going to feel the pain.

Those that need an auto loan in order to purchase a vehicle are going to find that loan payments are significantly higher than they were before.

Credit card rates will also go up, and those just getting out of school will discover that their student loan payments are even more suffocating.

But the biggest impact will be felt in the housing market.  The average rate on a 30-year fixed mortgage just hit the psychologically-important 4 percent barrier, and that could mean big trouble for the housing market in 2017

The average contract rate on the popular 30-year fixed mortgage hit 4 percent, according to Mortgage News Daily, a level most didn’t expect to see until the middle of next year. Rates have now moved nearly a half a percentage point higher since Donald Trump was elected president.

“The situation on the ground is panicked. Damage control,” said Matthew Graham, chief operating officer of Mortgage News Daily. “People were trying to lock loans quickly last week and are now facing a tough choice to lock today or hope for a bounce. Many hoped for a bounce last week heading into the long weekend and we obviously didn’t get it.”

Rising interest rates was one of the key factors that precipitated the financial crisis of 2008, and many fear that it could happen again.

And without a doubt, this rise in rates is going to affect the affordability of homes that are already on the market

“If you’re going to buy a house and your mortgage payment went up by $200 or $300, you may buy a smaller house. There’s impact on interest rate sensitive sectors, like autos and housing, and also corporate bonds themselves, where financial engineering has helped juice up the equity market,” said George Goncalves, head of rate strategy at Nomura.

In addition, rising rates will make it more difficult for those with adjustable rate mortgages to keep their homes.  Foreclosure activity was already up 27 percent during the month of October, and many are projecting that we could see another giant spike in foreclosures during the months ahead that is similar to what we saw during the last financial crisis.

Many Trump supporters don’t really care what the rest of the world thinks of our new president, but this is an area where what the rest of the world thinks really, really matters.

The truth is that the rest of the planet is not all too fond of Trump, and if that makes them a lot less eager to lend us money that is a major problem.

The only way that we can maintain our massively inflated debt-fueled standard of living is to continue to borrow gigantic mountains of money from the rest of the world at ultra-low interest rates.

If the rest of the world starts demanding higher rates of return now that Trump is president, we are going to experience economic pain on a scale that most Americans don’t believe is possible.

One of our big lenders has been China, and right now they are deeply concerned about what a Trump presidency might mean.  Trump has talked very tough about trade with China, and the Chinese are gearing up for a major trade war.  The following comes from CNBC

During his election campaign this year, Trump spoke of a 45 percent import tariff on all Chinese goods while failing to outline how it would work. Should any such policy come into effect, China will take a “tit-for-tat approach”, according to an opinion piece in the Global Times, a newspaper backed by the Communist party.

“A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.,” the Global Times article read.

Most Trump supporters assume that since Trump has been a very successful businessman that he will be able to strengthen the U.S. economy.

But it isn’t that simple.

The only reason we are able to live the way that we live today is because we have been able to borrow trillions upon trillions of dollars at irrationally low interest rates.

The moment the rest of the world decides that they are not going to loan us money at irrationally low interest rates any longer the game is over, and it won’t really matter who is in the White House at that point.

So watch interest rates very carefully.  If they keep going up, it is inevitable that a major economic slowdown will follow no matter what economic policies the new Trump administration implements.

Donald Trump Warns Americans To Get Out Of The Stock Market As The Dow Falls For A 7th Day In A Row

Donald Trump - VOA Public DomainOne thing that you have to appreciate about Donald Trump is that unlike most politicians, he actually says what is on his mind.  On Tuesday, Trump told Fox Business that he had already gotten out of the stock market, and that he foresees “very scary scenarios” ahead for investors.  And of course things have already started to get a bit ominous for those holding stocks over the last week and a half.  The Dow Jones Industrial Average has now closed down for seven days in a row, and that is the longest losing streak that we have seen since the panic of last August.  Over the past 12 months we have seen virtually every other major global stock market experience at least one major crash.  Could the U.S. markets be next?

What Trump told Fox Business earlier today was actually right on the money.  Our financial markets have been artificially inflated by the Federal Reserve, and all artificial bubbles of this nature eventually burst.  The following comes from a Bloomberg article that was posted on Tuesday entitled “Trump Urges Exit From Market Boosted by ‘Artificially Low’ Rates“…

Donald Trump on Tuesday said interest rates set by the Federal Reserve are inflating the stock market and recommended 401(k)-holders to get out of equities, just like he did.

“I did invest and I got out, and it was actually very good timing,” the Republican presidential nominee said in a phone interview with Fox Business. “But I’ve never been a big investor in the stock market.”

“Interest rates are artificially low,” Trump said. “The only reason the stock market is where it is is because you get free money.”

Trump’s comments come at a time when we are getting a whole host of bad news about the U.S. economy.  We just learned that U.S. GDP grew at a meager 1.2 percent annual rate during the second quarter, the rate of homeownership in the United States just hit an all-time record low, and corporate earnings have now been falling for five quarters in a row.

But perhaps most alarming of all is what is happening to the price of oil.  As I discussed yesterday, the price of oil has plunged well over 20 percent since June 8th, and it was down again on Tuesday.

As I write this article, the price of U.S. oil is sitting at just $39.66.  The psychologically-important 40 dollar barrier has been broken, but the price of oil doesn’t even have to go down another penny to do immense damage to the U.S. economy.  If it just stays at this price, we are going to bleed more energy industry jobs, more energy companies are going to default on their debts, and more financial institutions that are exposed to the energy industry are going to get into serious trouble.

All the ingredients are there for a major financial crisis, and perhaps that explains why so many investors are flocking to precious metals such as gold and silver right now.

The price of gold has gone up for six trading days in a row, and silver is approaching 21 dollars an ounce.

Meanwhile, things continue to unravel on the other side of the planet.  In Europe, let’s just say that the recent bank stress tests did not go as well as many were hoping

If the goal of the EBA Stress Tests was to reassure investors and regain confidence that ‘all is well’ in Europe’s increasingly fragile and systemically interconnected banking system, then it has utterly failed. The broadest European bank stock index is now down 7% from the post-stress-test spike highs, Italian banks are at record lows and being halted (despite Renzi’s promises), Commerzbank is struggling with capital raise chatter, and Deutsche Bank and Credit Suisse are tumbling after being booted from the Stoxx 50.

It is funny – every time I write a major article about Deutsche Bank, their stock goes to a new record low.

And it has just happened again.  Less than a week ago, I posted this article, and on Tuesday Deutsche Bank plummeted to a brand new record low as renewed fears about the health of the bank spooked investors.

Problems at Deutsche Bank and Credit Suisse are now becoming so obvious that even mainstream analysts are admitting that they are “causing some anxiety”

Deutsche Bank and Credit Suisse … are dropping to where they were after the Brexit vote,” said Bruce Bittles, chief investment strategist at Baird. “That’s causing some anxiety.”

Deutsche and Credit Suisse’s U.S.-listed shares closed down 3.75 percent and 4.67 percent, respectively.

In Europe nobody is waiting for financial stocks to crash, because they are already crashing.

A “too big to fail” crisis is rapidly unfolding across the entire continent, but most Americans are totally oblivious to what is going on over there.  Instead, our major news outlets are feeding us an endless barrage of negative headlines about Donald Trump and a steady stream of positive headlines about Hillary Clinton.

I wonder who they want to win the election?

Of course I am being sarcastic.  The days when the mainstream media at least pretended to be “independent” are long gone.

But as far as the stock market is concerned, I am quite confident that Donald Trump will be vindicated.

And if you don’t want to believe Donald Trump, I would encourage you to consider what Jeffrey Gundlach, the chief executive of DoubleLine Capital, has been saying.  He has been right about the markets in recent years over and over again, and just a few days ago he publicly stated that “stocks should be down massively” and that now is the time to “sell everything“.

Unfortunately, very few people are likely to change course at this stage.  Most of those that could see the warning signs have already gotten out of the market, and those that prefer to have blind faith in the system are not likely to listen to warnings from men like Trump and Gundlach.

So now it is just a waiting game.

We shall see if Trump and Gundlach are right, and those that end up on the correct side of the equation are probably going to make a boatload of money during the months ahead.

War Is Coming And The Global Financial Situation Is A Lot Worse Than You May Think

city skyscrapers clock time stopwatch seconds - public domainOn the surface, things seem pretty quiet in mid-July 2016.  The biggest news stories are about the speculation surrounding Donald Trump’s choice of running mate, the stock market in the U.S. keeps setting new all-time record highs, and the media seems completely obsessed with Taylor Swift’s love life.  But underneath the surface, it is a very different story.  As you will see below, the conditions for a “perfect storm” are coming together very rapidly, and the rest of 2016 promises to be much more chaotic than what we have seen so far.

Let’s start with China.  On Tuesday, an international tribunal in the Hague ruled against China’s territorial claims in the South China Sea.  The Chinese government announced ahead of time that they do not recognize the jurisdiction of the tribunal, and they have absolutely no intention of abiding by the ruling.  In fact, China is becoming even more defiant in the aftermath of this ruling.  We aren’t hearing much about it in the U.S. media, but according to international news reports Chinese president Xi Jinping has ordered the People’s Liberation Army “to prepare for combat” with the United States if the Obama administration presses China to abandon the islands that they are currently occupying in the South China Sea…

“Chinese president Xi Jinping has reportedly ordered the People’s Liberation Army to prepare for combat,” reports Arirang.com. “U.S.-based Boxun News said Tuesday that the instruction was given in case the United States takes provocative action in the waters once the ruling is made.”

A U.S. aircraft carrier and fighter jets were already sent to the region in anticipation of the ruling, with the Chinese Navy also carrying out exercises near the disputed Paracel islands.

Last October, China said it was “not frightened” to fight a war with the U.S. following an incident where the guided-missile destroyer USS Lassen violated the 12-nautical mile zone China claims around Subi and Mischief reefs in the Spratly archipelago.

Meanwhile, the relationship between the United States and Russia continues to go from bad to worse.  The installation of a missile defense system in Romania is just the latest incident that has the Russians absolutely steaming, and during a public appearance on June 17th Russian President Vladimir Putin tried to get western reporters to understand that the world is being pulled toward war…

“We know year by year what’s going to happen, and they know that we know. It’s only you that they tell tall tales to, and you buy it, and spread it to the citizens of your countries. You people in turn do not feel a sense of the impending danger – this is what worries me. How do you not understand that the world is being pulled in an irreversible direction? While they pretend that nothing is going on. I don’t know how to get through to you anymore.

And of course the Russians have been feverishly updating and modernizing their military in preparation for a potential future conflict with the United States.  Just today we learned that the Russians are working to develop a hypersonic strategic bomber that is going to have the capability of striking targets with nuclear warheads from outer space.

Unfortunately, the Obama administration does not feel a similar sense of urgency.  The size of our strategic nuclear arsenal has declined by about 95 percent since the peak of the Cold War, and many of our installations are still actually using rotary phones and the kind of 8 inch floppy disks for computers that were widely used back in the 1970s.

But I don’t expect war with China or Russia to erupt by the end of 2016.  Of much more immediate concern is what is going on in the Middle East.  The situation in Syria continues to deteriorate, but it is Israel that could soon be the center of attention.

Back in March, the Wall Street Journal reported that the Obama administration wanted to revive the peace process in the Middle East before Obama left office, and that a UN Security Council resolution that would divide the land of Israel and set the parameters for a Palestinian state was still definitely on the table…

The White House is working on plans for reviving long-stalled Middle East negotiations before President Barack Obama leaves office, including a possible United Nations Security Council resolution that would outline steps toward a deal between the Israelis and Palestinians, according to senior U.S. officials.

And just this week, the Washington Post reported that there were renewed “rumblings” about just such a resolution…

Israel is facing a restive European Union, which is backing a French initiative that seeks to outline a future peace deal by year’s end that would probably include a call for the withdrawal of Israeli troops and the creation of a Palestinian state. There are also rumblings that the U.N. Security Council might again hear resolutions about the conflict.

For years, Barack Obama has stressed the need for a Palestinian state, and now that his second term is drawing to a close he certainly realizes that this is his last chance to take action at the United Nations.  If he is going to pull the trigger and support a UN resolution formally establishing a Palestinian state, it will almost certainly happen before the election in November.  So over the coming months we will be watching these developments very carefully.

And it is interesting to note that there is an organization called “Americans For Peace Now” that is collecting signatures and strongly urging Obama to support a UN resolution of this nature.  The following comes from their official website

Now is the time for real leadership that can revive and re-accredit the two-state solution as President Obama enters his final months in office. And he can do this – he can lay the groundwork for a two-state agreement in the future by supporting an Israeli-Palestinian two-state resolution in the United Nations Security Council.

Such a resolution would restore U.S. leadership in the Israeli-Palestinian arena. It would preserve the now-foundering two-state outcome. And it would be a gift to the next president, leaving her or him constructive options for consequential actions in the Israeli-Palestinian arena, in place of the ever-worsening, politically stalemated status quo there is today.

Sadly, a UN resolution that divides the land of Israel and that formally establishes a Palestinian state would not bring lasting peace.  Instead, it would be the biggest mistake of the Obama era, and it would set the stage for a major war between Israel and her neighbors.  This is something that I discussed during a recent televised appearance down at Morningside that you can watch right here

At the same time all of this is going on, the global economic crisis continues to escalate.  Even though U.S. financial markets are in great shape at the moment, the same cannot be said for much of the rest of the world.

Just look at the country that is hosting the Olympics this summer.  Brazil is mired in the worst economic downturn that it has seen since the Great Depression of the 1930s, and Rio de Janeiro’s governor has declared “a state of financial emergency“.

Next door, the Venezuelan economy has completely collapsed, and some people have become so desperate that they are actually hunting cats, dogs and pigeons for food.

Elsewhere, China is experiencing the worst economic downturn that they have seen in decades, the Japanese are still trying to find the end of their “lost decade”, and the banking crisis in Europe is getting worse with each passing month.

In quite a few articles recently, I have discussed the ongoing implosion of the biggest and most important bank in Germany.  But I am certainly not the only one warning about this.  In one of his recent articles, Simon Black also commented on the turmoil at “the most dangerous bank in Europe”…

Well-capitalized banks are supposed to have double-digit capital levels while making low risk investments.

Deutsche Bank, on the other hand, has a capital level of less that 3% (just like Lehman), and an incredibly risky asset base that boasts notional derivatives exposure of more than $70 trillion, roughly the size of world GDP.

But of course Deutsche Bank isn’t getting a lot of attention from the mainstream media right now because of the stunning meltdown of banks in Italy, Spain and Greece.  Here is more from Simon Black

Italian banks are sitting on over 360 billion euros in bad loans right now and are in desperate need of a massive bailout.

IMF calculations show that Italian banks’ capital levels are among the lowest in the world, just ahead of Bangladesh.

And this doesn’t even scratch the surface of problems in other banking jurisdictions.

Spanish banks have been scrambling to raise billions in capital to cover persistent losses that still haven’t healed from the last crisis.

In Greece, over 35% of all loans in the banking system are classified as “non-performing”.

Even though U.S. stocks are doing well for the moment, the truth is that trillions of dollars of stock market wealth has been lost globally since this time last year.  If you are not familiar with what has been going on around the rest of the planet, this may come as a surprise to you.  During my recent appearance at Morningside, I shared some very startling charts which show how dramatically global markets have shifted over the past 12 months.  You can view the segment in which I shared these charts right here

I would really like it if the rest of 2016 was as quiet and peaceful as the past couple of days have been.

Unfortunately, I don’t believe that is going to be the case at all.

The storm clouds are rising and the conditions for a “perfect storm” are brewing.  Sadly, most people are not going to understand what is happening until it is far too late.

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