Image
Image

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):
October 27, 2008

Paper Assets Are Riskier Than Hard Assets

Image
As I have written about for years, hyperinflation is here to stay primarily due to the significant amount of new dollars created each month in order to try to minimize the melting down of the financial markets worldwide. Billions and Trillions are being created "out of thin air" as a "fiat currency". 

A "fiat currency" is not backed by any other hard asset (i.e. gold, silver). It is backed by the full faith and guarantee of the issuing government. Ever since Nixon took the U.S. off of the gold standard back in the early 1970s, our national currency is not backed by gold or any other type of physical asset.

Since the Fed discontinued releasing their M3 data (the broadest measure of all currency in circulation) back in March of 2006, we do not know how much new money is created on a monthly basis. The more money in circulation, the less the current and future value of that same currency (hyperinflation).

A combination of a physical asset and a paper asset is something called COMEX gold. COMEX gold is a form of debt. It is a promise by one party to produce gold for the other party at a future date. A COMEX futures contract is only as valuable as the counterparty who insures the investment (similar to a Credit Default Swap (CDS)). If the counterparty is unable to produce the gold at a later date, then the COMEX gold contract is essentially worthless. 

Many of the largest sellers of COMEX futures gold contracts are many of America's largest insolvent financial institutions. As a result, many of these COMEX contracts may have little to no current or future value. Some people who follow the COMEX industry closely believe that there is not enough gold currently held in storage to cover the existing COMEX futures contracts. In fact, some analysts believe that there may only be 10% of gold available to cover the existing gold COMEX contracts. OOPS!!!

Paper assets are risky. Hard assets like physical gold or silver bars or coins are much safer as the Credit Crisis continues the massive unwinding of the Quadrillion plus (1,000 Trillion) in primarily unregulated derivatives worldwide. Other hard assets like REO property pools priced as low as 10 cents on the dollar seem to make more sense than anything backed by the "full faith" of either an insolvent financial institution or a government. 

In the past quarter, the number of foreclosures in the state of California increased 228% over the same 3rd quarter in 2007. The most amazing part of that 228% increase in foreclosures is that a high percentage of lenders are not even bothering to file the foreclosure paperwork on a timely basis as they can't even keep up with their existing foreclosure inventory. 

As a result of the increasing foreclosures in California and nationwide, banks will be willing to discount their REO properties even more in the near term. These "hard asset" investments are much better than anything backed by seemingly worthless paper!!!

Comments

Hide Comments (0)       Add a new comment
Archives
tiangle  2019
tiangle  2018
tiangle  2017
tiangle  2014
tiangle  2013
tiangle  2011
tiangle  2010
tiangle  2009
tiangle  2008
tiangle  December (10)
tiangle  November (10)
tiangle  October (8)
dot The Credit Ca...
dot Currency &...
dot Paper Assets ...
dot Hyperinflatio...
dot Bursting Bubb...
dot I Told You So
dot Turn Off The ...
dot The Insolvent...
tiangle  September (8)
tiangle  August (14)
tiangle  July (17)
tiangle  June (18)
tiangle  May (19)
tiangle  April (19)
tiangle  March (19)
tiangle  February (3)