Rickards: World on Knife Edge of Debt Crisis

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Herbert Stein, a prominent economist and adviser to presidents Richard Nixon and Gerald Ford, once remarked, “If something cannot go on forever, it will stop.”

The fact that his remark is obvious makes it no less profound. Simple denial or wishful thinking tends to dominate economic debate.

Stein’s remark is like a bucket of ice water in the face of those denying the reality of nonsustainability. Stein was testifying about international trade deficits when he made his statement, but it applies broadly.

Current global debt levels are simply not sustainable. Debt actually is sustainable if the debt is used for projects with positive returns and if the economy supporting the debt is growing faster than the debt itself.

But neither of those conditions applies today.

Debt is being incurred just to keep pace with existing requirements in the form of benefits, interest and discretionary spending.

It’s not being used for projects with long-term positive returns such as interstate highways, bridges and tunnels; 5G telecommunications; and improved educational outcomes (meaning improved student performance, not teacher pensions).

And developed economies are piling on debt faster than they are growing, so debt-to-GDP ratios are moving to levels where more debt stunts growth rather than helps.

It’s a catastrophic global debt crisis (worse than 2008) waiting to happen. What will trigger the crisis?

In a word — rates. Low interest rates facilitate unsustainable debt levels, at least in the short run. But with so much debt on the books, even modest rate increases will cause debt levels and deficits to explode as new borrowing is sought just to cover interest payments.

Real rates can skyrocket even as nominal rates fall if deflation takes hold. Real rates are nominal rates minus the inflation rate. If the inflation rate is negative, real rates can be significantly higher than the nominal rate. (A nominal rate of 1% with 2% deflation equals a real rate of 3%.)

The world is on the knife edge of a debt crisis not seen since the 1930s. It won’t take much to trigger the crisis.

Meanwhile, the stock market is set up for a sharp decline in the days and weeks ahead. Here’s why…

Stock market behavior has become remarkably easy to predict lately. Stocks go up when the Fed cuts rates or indicates that rate cuts are coming. Stocks also go up when there’s good news on the trade war front, especially involving a “phase one” mini-deal with China.

Stocks go down when the trade war talks look like they’re breaking down. Stocks also go down when the Fed indicates it may stop raising rates or actually goes on “pause.”

Good news (rate cuts in July, September and October and good prospects on the trade wars) has outweighed bad news, so stocks have been trending higher. You don’t have to be a superstar analyst to figure this out.

The key is to understand that markets are driven by computerized trading, not humans. Computers are dumb and can really only make sense of a few factors at a time, like rates and trade.

Just scan the headlines (that’s what computers do), weigh the factors and make the call. It’s easy! What’s not so easy is understanding where markets go when these factors are no longer in play.

Stocks are in bubble territory, based on weak earnings, and have been propped up by expected good news on trade.

The other driver is FOMO — “fear of missing out” — that can turn to simple fear in a heartbeat. If the phase one trade deal and a successor to NAFTA (USMCA) are both approved by late December and the Fed pauses rate cuts indefinitely, which are both likely, what’s left to drive stock prices higher?

It won’t be earnings or GDP, which are both weak. Once the good news is fully priced in, there’s nothing left but bad news. And we’re at the point right now.

That leaves stocks vulnerable to a sharp decline around year-end or early 2020. Simple solutions for investors include cash, gold and Treasuries. Get ready.

Here’s another way to get ready for what 2020 has in store. I’d like to invite you to join myself, Robert Kiyosaki, Nomi Prins and other world-class experts as we discuss what you can expect for 2020.

Regards,

Jim Rickards
for The Daily Reckoning

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7 Steps to Shock-Proof Your Finances

This post 7 Steps to Shock-Proof Your Finances appeared first on Daily Reckoning.

On January 25th President Trump announced an end to the 35-day partial government shutdown.

This day came as a relief to many of the 800,000 government employees and contractors who were left scrambling to cover their bills until their paychecks kicked in again.

A lot of people did just fine during the government shutdown, thanks to emergency savings and the added safety net of a working spouse. But for others, the sudden halt in cash flow created a crisis.

This episode was a reminder for how many Americans live paycheck to paycheck. The Federal Reserve announced last year that 40% of Americans don’t have enough saved to write a $400 check in an emergency.

And growing consumer debt seems to only be making matters worse. Since 2013, we’ve had more debt than in 2008, driven mostly by high student and auto loans.

The good news is we’re paying off this debt fairly well because we’ve just had one of the longest bull markets in history. The bad news is one day the stock market will cycle into a bear market and the economy will slow leaving many scrambling again to pay their bills.

To help you prepare for the next sudden financial crisis, here are 7 steps you can take to shock-proof your finances.

1. Build a Budget

You need a budget so you know how much money you have coming in and what expenses you have to cover. A quick and easy way to build a budget is use an online budgeting tool or app that links to your bank, investment, credit card and other accounts. Mint and Personal Capital are my favorites.

If you’ve never budgeted before, a simple breakdown you can follow is the 50/30/20 rule. 50% of your income should go toward essential expenses, like your mortgage, utilities, food, car, etc. 30% is allocated to nonessentials, think eating out, shopping, entertainment.

And 20% of your income goes to savings like your retirement accounts, emergency fund, and paying down any outstanding debt.

2. Checkmark Nonessentials

Once you’ve built your budget, grab a red marker or open a document on your computer or phone and checkoff all your non-essential expenses that could go if you needed to tighten your belt.

Memberships and subscriptions are primary suspects. If you have a gym membership you barely use, you can cancel it and workout at home. Cable TV and streaming subscriptions are also nonessentials that can get cut if you run into a financial squeeze.

The point is have a list of these nonessentials ready so when the day comes, you can easily lighten the load.

3. Build a Rainy Day Fund

A rainy day fund is different than your emergency fund. Your emergency fund is meant for catastrophes like losing your job, divorce, or medical or mental disability that affect your cash flow.

Rainy day funds are for urgent but less-catastrophic needs, like car and home repairs, medical and vet bills, or short-notice travel to be with a sick relative.

Open a sub-savings account and set up auto-transfers on a bi-weekly basis to start funding your rainy day savings. How much should you save? For most homeowners, anywhere between $3,000-$5,000 is enough. Renters can probably get away with $1,500-$2,000.

4. Slash Your Debt

Even if there’s no financial crisis looming, you should be paying down your debt regularly. Pay your debt off from highest to lowest interest rate first. You may even be able to consolidate your debt into a lower-rate, sometimes 0% credit card or loan.

Make sure you can pay off enough of the balance to make the transfer worthwhile during the 0% window. Alternatively, look for a debt-consolidation personal loan. There are several new online lenders that offer decent rates.

Go to www.supermoney.com, and enter details about yourself (like education level, income and employment status), the type of debt you have and how much you’d like to borrow.

The site generates offers from different lenders, like LendingClub, LightStream and SoFi.

5. Prime Your Credit

The best time to get approved for a line of credit is before you need one. If you think you might need to fall back on a line of credit, then get approved for a HELOC now.

Also ask your credit card provider to raise your credit limit. This will do two things: one, help you lower the amount of available credit you use (which will lift your credit score); two, give you more credit at your disposal in a pinch.

TransUnion did a study and found consumers are 50% more likely to receive a credit-line increase between January and May, so now is the perfect time to ask.

6. Boost Your Paycheck

The recent tax overhaul lowered taxes for millions of Americans, but only 19% of taxpayers updated their withholding in response to the new law, says H&R Block.

If you’re getting a sizeable refund this year, adjust your withholding and give your paycheck a boost. You can use the extra money to pay off high-interest debt, build your rainy day fund or increase retirement savings.

Use the IRS’s Withholding Calculator tool to figure out how to reduce the amount withheld from your paycheck.

7. Top Up Your Health Coverage

If you have a policy with a deductible of at least $1,350 for single coverage or $2,700 for family coverage, you can contribute up to $3,500 to a health savings account for single coverage or $7,000 for family coverage in 2019, plus $1,000 if you’re 55 or older.

Top up savings if you have the means. Contributions are tax-deductible and can be withdrawn tax-free for eligible medical expenses in any year.

Follow these 7 steps and you’ll be in a good position to weather any financial storm.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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