Two weeks ago we passed the milestone marker of being 10 years out passed the Great Recession of 2008. As many will say emphatically, the aftermath of that downturn was financially devastating. The masses will also say, “I never want to go through that again”. Unfortunately, the further we move away from 2008, the closer we are getting once again to several financial bubbles bursting.
Revisiting Financial Bubbles of the Past
Alan Greenspan said this about financial bubbles and how humans behave, “Extraordinary human behavior, which is not what we could consider ideal, must be innate. They seem to break out everywhere—again and again. There’s a long history of forgetting bubbles. But once that memory is gone, there appears to be an aspect of human nature to get cumulative exuberance. When the bubble inevitably breaks, as reality fails to meet expectations, the result is a dramatic 180-degree switch from exuberance to fear.”
It is indisputable that the boom before the downturn in 2008 was fueled by debt, real estate debt, bank and corporate debt from derivatives. Not many were telling the warning signs. Yet when the bubble popped there was a 180-degree switch from exuberance to fear, just like Greenspan mentioned. Post 2009 is fueled by more debt. This time government spending as well as the Fed creating money from Quantitative Easing. Now, 10 years later, human behavior of thinking is that this boom will go on for a while. I’ve heard some say recently maybe up to 10 years of an economic boom. This sounds just like before, exuberance defying history.
Let’s take a look at how these financial bubbles have grown to unprecedented and unmanageable levels.
Treasury Bills Issued
Treasury Bills are issued when there is not enough revenue coming in to fund the government and the obligations we have committed to in the budget. In 2016 the Treasury created a total of $440 Billion. In 2017 the Treasury created $519 Billion, the highest since 2010. The Treasury injected a considerable amount in 2009 and the Fed bought those assets. Otherwise, it would be fair to say that 2017 is the year that the most Treasuries have ever been created in one year to fund the over spending of our country. That you will see is nothing compared to the huge increase in 2018.
In February this year the Treasury announced it would create $955 Billion in Treasuries, an 84% increase from 2017. This was the second largest increase in history with the exception of what I just mentioned in 2009. When the announcement came I did some calculations and I said it will be more like $1.2-$1.4 Trillion. I went on national radio giving my predictions. Startling a few, I backed up my calculations with facts proving how the government projections of spending and the Treasury reactions were significantly different from what I saw as reality.
Let’s take a look back at the real revised numbers announced. In 2018 1st quarter the Treasury announced it created $488 Billion, in the 2nd quarter $75 Billion was created. Recently, the Treasury announced it would borrow $769 Billion for the 2nd half of the year, putting the total creation of Treasuries in 2018 at $1.33 Trillion, directly in the middle of my projections. That is an increase of 156% from 2017’s historical high.
The two biggest buyers of Treasuries are China and the Fed. Historically the biggest buyer and holder of our debt has been China since we do the most amount of trading with them. We have relied upon them to buy our debt every year. This year China didn’t buy Treasuries like previous years. Their purchasing is down, and they have been selling their Treasury holdings. At the height of their holdings, four years ago, they held $4.3 Trillion. Their current holdings are $1.182 Trillion. They have been selling Treasuries and buying Gold. Russia just sold 90% of their Treasuries and used the proceeds from the sale to add to their Gold holdings.
The chart below tells the story of the Fed purchasing Treasuries in 2009. Prior to the purchases of Treasuries through the Quantities Easing program the Fed held $476 Billion in Treasuries. At the height of their holdings before unwinding (selling) they held $2.462 Trillion in Treasuries. The Fed plan is to sell close to what they purchased or until this causes a severe change to the economic environment.
One of the reasons why this has happened is because of a Budget Deficit. This is caused by what Congress agrees to spend in the budget, and when there is not enough revenue coming in then we have a Budget Deficit. This deficit has been growing for decades. Recently much faster than in recent times. It rose 19% from last year. Now it is reaching $900 Billion, and soon will hit over $1 Trillion a year. Hitting that mark is a year ahead of the plan put into place by Congress last year.
Goldman Sachs recently gave a major warning in that a huge wave of as much as $1.3 Trillion in Corporate Debt is set to mature. According to this new report from the most likely precipitating factor would be rising interest rates which after the next major round of debt rollovers over the next couple years in an environment of rising rates would push corporate cash flows low enough that debt can no longer be serviced effectively. The reports describe there is a substantial amount of debt coming due over the next few years: according to the bank’s estimates there is over $1.3 trillion of debt for our non-financials coverage maturing through 2020, roughly 20% of the total debt outstanding. This report comes on the heels of 10 years after The Great Recession in 2008. Keep in mind Lehman Brothers only needed $40 Billion to bail them out. They didn’t get that and they were forced into bankruptcy. Let’s put that into perspective. Goldman Sachs says the number Corporate America faces is $1.3 Trillion. Just this alone, you can now see, there will more than likely be a severe financial challenge coming soon.
Interest on National Debt
Without any additional spending bills passed the interest on our National Debt is growing to historical levels. Some of that is caused simply by raising rates, which the Fed is doing. The other part of the interest payment growing is the National Debt is growing due to overspending. The third part is because we are not paying this debt down rather it is snowballing. If you think of this as a credit card, we as a country are not making enough of the minimum payment on the national debt. In addition, we are making more “charges” that makes the “balance” (or our debt) higher. While that is happening the interest rate is going up. Our country cannot afford any more spending. We just passed a $854 spending bill that will need to be funded. The interest on the National Debt for the first time is now over half of a Trillion Dollars, growing over 25% from last year. Many say, “Well the economy is growing, creating more jobs, and therefore more revenue coming to the government.” This sounded good in theory, yet when it was said I passionately responded that there has never been a time in history where this has worked. Here are the results so far. Payroll taxes are up 4% while Tax revenue fell 30% from last year due to tax cuts. That is the short term picture and the long term picture is more bleak. The GDP (revenue to our country) is up 38% over the past decade while the National Debt increased 122% meaning for every $1 that came in we spent $3.
We are “digging” ourselves in to a financial pit that is irreversible without moderate to severe consequences when we are forced to deal with this issue.
Currently the National Debt is $21.5 Trillion. In the last 12 months the national debt has increased $1.47 Trillion, the most in a one-year timeline. Many well-known well respected economists, The International Monetary Fund, The Congressional Budget Office, The Bank of International Settlement, and others all concur that the United States is on a trajectory course that is unsustainable. Even though the economy is growing, unemployment is at a generational low of 3.9%, wage growth has been the highest since April 2009, and we just added over 200,000 new jobs last month, these reasons are not near enough to change this course heading toward financial devastation.
Due to the reaction of the Fed and also the government’s multiple decisions to continue to spend, massive debt bubbles have been formed. Servicing Debt is not a magical thing. Debt always has to get serviced or paid for, otherwise default happens. It is easier to service debt in a low interest rate environment rather than a higher rate environment.
The Fed is selling our Treasuries while at the same time raising rates. The disturbing fact once again was confirmed when Fed Chairman, Jerome Powell inadvertently confirmed the dilemma of the Fed will continue to raise rates until something breaks. Unfortunately, 7 out of the last 8 times the Fed has raised rates it has caused recession. It looks like that is where we are headed.
Bamboo Tree Effect
This event will come on suddenly. I call it the Bamboo effect. If you plant a bamboo seed in the ground and continue to water it, you will see that nothing will happen for 5 years. In the 5th year the bamboo seed germinates. In the next year the bamboo plant will grow up to 90 feet tall. Debt operates the same way. It is ignored, put off, not managed, call it what you want. Then there is a time when it takes hold and has to be serviced.
A well respected host on CNBC, Rick Santelli, has commented for years against government spending and also the Fed expanding their balance sheet. In 2009 I saw him scream into the cameras saying creating this debt and what the Fed is doing with Quantitative Easing is pure insanity. He has said recently he is now concerned that whatever the Fed does or doesn’t do it could either kill the economy or could actually cause the U.S. to have massive inflation. He has had many guests on his program saying the same. In either environment, we will see a big move in Gold. This is due to the fact that we are “digging” ourselves in to a financial pit that is irreversible without moderate to severe consequences when we are forced to deal with this issue. As interest rates rise, more debt is created, along with continued spending, and foreigners backing away from buying our debt in the form of Treasuries, the teeter totter will tip the other direction triggering a major change and there will be a flight towards Gold. In that environment all debt assets will be in trouble because servicing debt will be challenging just like it was when one domino fell in 2008, many others fell. This will be no different just much larger. When you connect the dots as many billionaires have connected, you now can understand why many like Jim Rogers, Ray Daleo, Jeffery Gundlach, and many others say there is a financial crisis coming within the next 2 years that will be more severe than any other in our lifetime, and it is imperative to get some gold in your portfolio.
As CEO of the company I would like to hear from you. I thought we would do something fun for the month of October. If you have read this newsletter, please call my company so you can enter into a drawing to be the winner of three things:
- A beautiful looking uncirculated silver Morgan Dollar.
- A book on coins, that give the history of U.S. coins and how to invest in them.
- A free consultation with me of which we call “Your Financial Blueprint”, where I have helped thousands of people personally in 25 years understand what causes metal markets to go up, and the different types of metals markets there are, along with their benefits and also drawbacks.
By calling our company at 877-488-2646 and telling one of my representatives you read this month’s newsletter you will be entered one time into the drawing that will be drawn on Thursday, November 1st, 2018.
Now let’s give this fun a twist.
When you call in, if you are one of the first 100 callers that guess this riddle correctly you get another entry into the contest.
Here is the riddle:
It makes you feel empowered and masks your reality,
It takes you further than you really want to be.
It holds you there longer than you decide to stay,
In the end you wished this would all just go away.
A person, a company, a country, it will deceive them all,
Not taken care will cause a great fall.
What am I?
Many who have contacted my company in the past can verify we believe in education and there is never any pressure. I have always believed; people can make their own decisions given factual information. Pressure is just another form of disrespect. Call my company and you will see for yourself.