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The Consumer Debt Anchor
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):
April 8, 2008

How Overvalued Are Stocks These Days?

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Since most of the media tends to focus on the negative news on real estate, I thought that I would update readers on the latest news on the values of stocks. The Credit Crisis has caused revenues to drop significantly for many Dow Jones and S & P 500 companies of late. However, many of their stock values haven't dropped in proportion to the losses in earnings. 

Remember, Hedge Funds are some of the largest investors in the U.S. stock market these days. In some cases, they may invest and control up to 40% of the total overall stock investments in the U.S. Most Hedge Funds have a short term buy and hold strategy. Some days, they buy stocks "long", and other days they "short" certain stocks. A "short" is when you profit when the stock's value drops.

As of a few days ago, the Dow Jones' P/E (Price to Earnings Ratio) is slightly under 54. The P/E Ratio is the most basic form of measurement used by many people to determine the true current value of a company. If the P/E Ratios are too high, then the stock values may be too high. Let's take a look at past periods of time and their corresponding P/E Ratios:

* In 1929 (start of the Great Depression), the P/E Ratios for the Dow were just over 32. 
* In 1932, the Dow P/E Ratios hit an all time low of 5.6. 1932 was considered one of the worse economic years in the 20th Century.
* In 1966, the Dow's P/E Ratios were just over 24.
* In 1982, the Dow's P/E Ratios were close to 7. The average Dow stock prices were almost the same in 1982 as they were in 1966, but the earnings were substantially better.
* In 1987, the Dow P/E Ratios dropped from 18.3 to 13.4. Do you remember Black Monday (Oct. 17, 1987) when the market "crashed" for a short period of time?
* In 1999 (prior to the "Dot Com" & Telecommunications Stock Bubble Crashes), the P/E Ratios hit an absurbly high 44.2.

In years past, a P/E Ratio above 25 is considered RISKY. We are now more than double the RISKY Price To Earnings Ratio Guidelines. Where is the real bubble right now? Is it stocks, real estate, or both?

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