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Skyrocketing Consumer Debt & Falling Rates
With home mortgages, the primary collateral for the loan balance is the home itself. In the event of a future default, the lender can file a foreclosure notice and take the property back several months later. With automobile loans, the car dealership or current lender servicing the loan can repossess the car.


Homeowners often refinance their non-deductible consumer debt that generally have shorter terms, much higher interest rates, and no tax benefits most often into newer cash-out refinance mortgage loans that reduce their monthly debt obligations. While this can be wise for many property owners, it may be a bit risky for other property owners if they leverage their homes too much.

With credit cards, lenders don’t have any real collateral to protect their financial interests, which is why the interest rates can easily be double-digits about 10%, 20%, or 30% in annual rates and fees, regardless of any national usury laws that were meant to protect borrowers from being charged “unnecessarily and unfairly high rates and fees” as usury laws were originally designed to do when first drafted.

Zero Hedge has reported that 50% of Americans don’t have access to even $400 cash for an emergency situation. Some tenants pay upwards of 50% to 60% of their income on rent. A past 2017 study by Northwestern Mutual noted the following details in regard to the lack of cash and high credit card balances for upwards of 50% of young and older Americans today:

* 50% of Baby Boomers have basically no retirement savings.

* 50% of Americans (excluding mortgage balances) have outstanding debt balances (credit cards, etc.) of more than $25,000. 

* The average American with debt has credit card balances of $37,000, and an annual income of just $30,000. 

* Over 45% of consumers spend up to 50% of their monthly income on debt repayments that are typically near minimum monthly payments.

 

Rising Global Debt 

 

According to a report released by IIF (Institute of International Finance) Global Debt Monitor, debt rose to a whopping $246 trillion in the 1st quarter of 2019. In just the first three months of 2019, global debt increased by a staggering $3 trillion dollar amount. The rate of global debt far outpaced the rate of economic growth in the same first quarter of 2019 as the total debt/GDP (Gross Domestic Product) ratio rose to 320%.

The same IIF Global Debt Monitor report for Q1 2019 noted that the debt by sector as a percentage of GDP as follows:

  
Households: 59.8%

* Non-financial corporates: 91.4%

* Government: 87.2%

* Financial corporates: 80.8%

 


Rate Cuts and Negative Yields

As of 2019, there’s reportedly an estimated $13.64 trillion dollars worldwide that generates negative yields or returns for the investors who hold government or corporate bonds. This same $13.64 trillion dollar number represents approximately 25% of all sovereign or corporate bond debt worldwide. 

 

On July 31, 2019, the Federal Reserve announced that they cut short-term rates 0.25% (a quarter point). Their new target range for its overnight lending rate is now somewhere within the 2% to 2.25% rate range. This is 25 basis points lower than their last Fed meeting decision reached on June 19th. This was the first rate cut since the start of the financial recession (or depression) in almost 11 years ago dating back to December 2008.
 

It’s fairly likely that the Fed will cut rates one or more times in future 2020 meeting dates. If so, short and long-term borrowing costs may move downward and become more affordable for consumers and homeowners. If this happens, then it may be a boost to the housing and financial markets for so long as the economy stabilizes in other sectors as well such as international trade, consumer spending and the retail sector, government deficit spending levels, and other economic factors or trends.

We shall see what happens in the near future in 2020 and beyond.

* The blog article above is a partial excerpt from my previous article entitled Interest Rate and Home Price Swings in the Realty 411 Magazine linked below (pages 87 - 91):
February 25, 2010

The Financial Market Meltdown

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As we now are well into the first quarter of 2010, the various financial markets continue to either worsen, or not make any sense whatsover. Typically, a country's economy is considered somewhat solid if their overall unemployment numbers are low. Sadly, many economists and financial analysts nationwide are now saying that the true unemployment numbers may lie somewhere between a low of 10% to as high as 22%.

Strangely, the U.S. stock market (i.e. the Dow Jones - a group of 30 companies) values have been on an upswing over the past years as the index hovers near 10,000. As retail spending has been on a major downswing over the past few years, these relatively high Dow Jones index numbers seem to defy logic.

Many financial experts believe the current Dow Jones' Price to Earnings (P / E) Ratio numbers may be at all time highs right now. High P / E ratio numbers tend to show investors that the stock values are overvalued, and may foreshadow a drop in these same respective stock value numbers.

As bizarre as the U.S. stock market situation seems right now, the U.S. bond market is even more unusual as one actually reviews what is going on with the U.S. Treasuries Bond Market. As America is currently the largest debtor nation in the history of our planet, our spending levels the past few years have escalated to ridiculously high levels.

In years past, America may borrow the money from individual investors, companies, foreign investors, and foreign governments and, in turn, issue IOUs via these same bond instruments. Some Treasury securities may be in the form of short term Notes (i.e. 90 days), and other securities may be issued in the form of longer term Bonds which are due and payable several years down the road.

Three of the most common Bond bidders or investors in years past have typically falling within one of these three major categories:

1.) Primary Dealers: These are the banks and financial institutions which trade daily with the Federal Reserve and the Bank of New York who typically have to buy treasuries at auction in order to temporarily park their money.

2.) Direct Bidders: These are the usual investors such as "Mom and Pop from Main Street", IRA or 401 pension money, and other direct investors.

3.) Indirect Bidders: Those investors who tend to place their orders anonymously through direct bidders.

Several years ago, Japan and China were thought to purchase up to 50% plus of all U.S. Treasury debt each year. Last year, the Federal Reserve supposedly purchased the bulk of the Treasury Bonds as there were not enough Primary Dealers, Direct Bidders, Indirect Bidders, or foreign investors (private or government) in order to keep the bond market from collapsing.

When the Federal Reserve and U.S. Treasury are forced to buy U.S. bonds by printing money "out of thin air", then this may be a scenario which leads to hyperinflation and a weakening U.S. dollar.

Please remember that 30 year mortgage rates are tied directly to the 10 year Treasury Bond yields. In years past, less bond investors typically meant higher bond yields which, in turn, led to much higher mortgage rates. If we were in "normal" economic time periods right now, then our long term mortgage rates (i.e. 30 year fixed mortgage rates) may be closer to 10% plus due to the incredibly low bond investment demand.


In recent days, weeks, and months, Treasury bond auctions have primarily come from Primary Dealers (those financial institutions who are forced to buy this debt). Sadly, a Treasury debt auction which attracts mainly Primary Dealers may be very BAD NEWS for the U.S. bond market as it means that investors (individual Americans and foreign investors) are not buying much debt either. In fact, China keeps issuing press releases threatening to SELL much of their U.S. bond holdings instead of buying more debt.

Many of these Treasury Bond offering prices are actually yielding prices in the 0.0000% to 0.50000% price range. How can these incredibly low to negative yields actually inspire or motivate many investors to purchase these short to long term debt offerings? If many investors believe that we are on the verge of rampant hyperinflation in the near term, then this may mean that this debt will be paid off down the road with cheaper dollars.

The stock, bond, real estate, and commodities markets are all interrelated to one another. As the largest banks continue to weaken nationally due to their trillions in dollars in on and off balance sheet debts (i.e. Collaterized Debt Obligations (CDOs), Credit Default Swaps, Structured Investment Vehicles (SIVs), Interest Rate Option Derivatives (the primary debt and insurance instrument which was the main reason why Orange County, CA filed for bankruptcy in '94 as a result of their Merrill Lynch investments, and other complex debt and insurance hybrid instruments), I expect hundreds, if not thousands, of more banks to fail in the very near future.

As a result, I see a continued economic downturn in both the short and long term UNLESS something dramatically changes for the better in the near term. Hopefully, some of the financial "geniuses" on Wall Street, at the U.S. Treasury and the Fed, or in Washington D.C. may be able to figure out some positive solutions which may improve this national financial disaster situation.



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