Bigger Isn’t Better

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What caused the overnight lending market to unexpectedly seize up in September? There’s a good reason to believe JPMorgan Chase (JPMC) may have been at the heart of it.

JPMorgan Chase is the largest bank in the U. S., and has about $1.49 trillion in deposits. It’s one of the big banks that provide much of the loans in the overnight money markets.

But it seems the mega-bank had gone on a stock buyback spree from January through September of this year.

Buybacks, which are designed to boost stock prices, have been enabled for years by the Fed’s artificially low-interest rates. Corporations, in fact, have been the largest purchasers of stocks, which is heavily responsible for the bull market that’s now over a decade old.

According to the SEC, JPMC has spent about $77 billion on buybacks since 2013. But the money JPMorgan Chase used for buybacks on its most recent buyback binge was, therefore, unavailable to be loaned out in the repo market.

This information is from the bank’s annual SEC filing (hat tip to the Wall Street on Parade blog):

In 2019, cash provided resulted from higher deposits and securities loaned or sold under repurchase agreements, partially offset by net payments on long-term borrowing… cash was used for repurchases of common stock and cash dividends on common and preferred stock.

That diversion of money likely contributed to the liquidity crunch, which forced the Fed had to intervene in order to make up the difference.

Here’s how Wall Street on Parade sums it up:

Had JPMorgan Chase not spent $77 billion propping up its share price with stock buybacks, it would have $77 billion more in cash to loan to businesses and consumers — the actual job of its commercial bank. Add in the tens of billions of dollars that other mega banks on Wall Street have used to buy back their own stock and it’s clear why there is a liquidity crisis on Wall Street that is forcing the Federal Reserve to hurl hundreds of billions of dollars a week at the problem.

But altogether, JPMorgan has actually withdrawn $158 billion of its liquid reserves from the Fed in the first half of this year. That’s an extraordinarily large amount of money to withdraw in such a short amount of time, as my friends at Wall Street on Parade point out. That’s bound to have an effect on the market.

And that’s what we’ve seen.

Of course, JPM is one of those Wall Street banks that are “too big to fail.” It’s the largest commercial bank in the nation, with $1.6 trillion in deposits.

But it’s not just JPM.

It’s just one part of a system rigged in favor of Wall Street that has been deemed too big to fail. It’s a corrupt and incestuous system filled with perverse incentives and conflicts of interest. Here’s an example…

82% of bank analysts on Wall Street recently gave Citigroup stock a “buy” rating. What you didn’t hear reported on CNBC or Fox Business News is that the major banks they work for — like JPM, Goldman Sachs, Morgan Stanley, Deutsche Bank, UBS and Bank of America — have strong incentive to recommend Citigroup.

That’s because all the major banks are interconnected through derivatives. And weakness in one bank could spill over into the others. So it’s not a level playing field at all. It’s tilted in favor of the big banks.

But as one observer asks, “Why should any Wall Street bank be allowed to make research recommendations on stocks and then trade in those very same stocks?”

It’s a corrupt system designed by insiders for insiders. I should know because I used to be one of them.

I worked at four of the world’s major banks for a decade and a half until I finally had enough and walked away. Two of the four banks I worked for, Bear Stearns and Lehman Bros., were destined to implode.

That’s because they overleveraged themselves, taking on too much debt to bet on risky credit instruments. These credit instruments included subprime loans, credit derivatives and Wall Street’s version of a debt buffet called CDOs, or collateralized debt obligations.

It’s now been over a decade since the world’s major central banks reacted to the financial crisis with record-low interest rates and quantitative easing.

Today the big banks are bigger than ever and the amount of debt in the system is larger than ever. There’s been no substantial reform since the financial crisis, just some cosmetic moves that have been passed off as major reform. The big banks are always ahead of the regulators.

My research for my book Collusion: How Central Bankers Rigged the World revealed how central bankers and massive financial institutions have worked together to manipulate global markets for the past decade.

Major central banks gave themselves a blank check with which to resurrect problematic banks; purchase government, mortgage and corporate bonds; and in some cases — as in Japan and Switzerland — buy stocks, too.

They have not had to explain to the public where those funds are going or why. Instead, their policies have inflated asset bubbles while coddling private banks and corporations under the guise of helping the real economy.

The zero-interest rate and bond-buying central bank policies that prevailed in the U.S., Europe and Japan were part of a coordinated effort that has plastered over potential financial instability in the largest countries and in private banks.

It has, in turn, created asset bubbles that could explode into an even greater crisis the next time around.

The world’s debt pile sits near a record $246.5 trillion. That’s three times the size of global GDP. It means that for every dollar of growth, the world is borrowing three dollars.

Of course, this huge debt pile has done very little to support the real economy. Even the IMF now admits that global central bank policies to lower interest rates in order to stave off immediate economic risks have made the situation worse.

Their actions have led to “worrisome” levels of poor credit-quality debt as well as increased financial instability.

The IMF noted that 40% of all corporate debt in major economies could be “at risk” in the event of another global economic downturn, with debt levels greater than those of the 2008–09 financial crisis.

That huge pile of debt is basically the kindling for the next financial fire. We’re just waiting for the match to light it.

So today we stand near — how near we don’t yet know — the edge of a dangerous financial conflagration. The risks posed by the largest institutions still exist, only now they’re even bigger than they were in 2007–08 because of the extra debt.

It’s not sustainable. But that doesn’t mean the central banks won’t try to keep it going with monetary easing policies in place.

It could work for a while, until it doesn’t.

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The Ancient Solution to Eliminate America’s Debt

This post The Ancient Solution to Eliminate America’s Debt appeared first on Daily Reckoning.

Yesterday we likened the economy to an overswollen tick, obese with blood.

Rather than blood, the economy is obese with debt.

Like our ludicrously engorged arachnid, the economy cannot much expand. It is impossibly loaded down… and groans under the burden, horribly swaybacked.

The economy will continue to wallow — unless it can shake off the weight.

But how can it?

Today we blow the dust off an ancient solution… and polish it up for the 21st century.

It may flabbergast and stagger you. You may laugh it out of court.

But it may offer the only way out. What is it?

The answer momentarily. We first check on another preposterously inflated behemoth — the stock market.

The bears won the day on majority decision…

The Dow Jones lost 28 points on the day. The S&P slipped a single point. The Nasdaq, meantime, scratched out a four-point gain today.

In all, a quiet an uneventful December day.

But how can the economy unload the gargantuan debt load that saddles it, hagrides it and torments it?

We must first come to terms with the facts…

Not Much Bang for the Buck

The United States government has since borrowed some $13 trillion since the financial crisis.

These borrowings have hoisted the United States national debt above $23 trillion.

Yet the American economy expanded only $5.1 trillion these past 10 years.

That is, while GDP has expanded less than 40%… the national debt has increased over 120%.

Parallel the past decade to the locust years of the Great Depression…

Real GDP 1929–1940 expanded at a cumulative 19.89% rate.

But for the past 11 years, cumulative GDP expanded 18.85%.

That is, the economy of the Great Depression — cumulatively — outperformed today’s.

And consider:

Average real annual economic growth since 2009 runs to 2.23%. But the larger trend since 1980 is 3.22%.

The Cost of Lossed Growth

One percentage point may seem a trifle. And one year to the next it is.

But Jim Rickards calculates the United States would be $4 trillion richer today — had the 3.22% trend held this decade.

Run it out 30, 50, 60 years… and Jim concludes the nation would be twice as rich over a lifetime.

Here you have a grim lesson in the meaning of negative compounding interest.

Meantime, the Congressional Budget Office (CBO) projects economic growth to limp along at an average 1.9% per annum 10 years out.

That 1.9% stands against the 3.22% rate common until the great gale of 2008 blew on through.

More debt… less growth.

And so the Keynesian “multiplier” has taken up division.

A “Scoundrel Economics”

Here is the deeper lesson:

Debt-based consumption steals from the future to gratify the present. It brings tomorrow’s consumption forward to today — and leaves the future empty.

We have borrowed from the future so heavily and so long… we are writing checks against a failing bank.

It is a juvenile economics, a wastrel economics, a deadbeat economics — a scoundrel economics.

“The wicked borrows, and cannot pay back”… as Psalm 37:21 informs us.

Meantime, federal debt presently rises three times the rate of revenue coming in. And trillion-dollar deficits gape to the farthest horizon.

CBO projects annual deficits 10 years out will average $1.2 trillion.

Allow for the inevitable smash-up recession. Deficits could double… or possibly triple.

As is, debt service alone could rise to $915 billion by 2028 — nearly 25% of the entire budget.

For the long-term sufferings we turn to the Brookings Institute:

Sustained federal deficits and rising federal debt, used to finance consumption or transfer payments, will crowd out future investment; reduce prospects for economic growth; make it more difficult to conduct routine policy, address major new priorities or deal with the next recession or emergencies; and impose substantial burdens on future generations.

$210 Trillion in Debt?

And we have failed to mention “unfunded liabilities.”

Future Social Security, Medicare and Medicaid obligations are not fully tallied in official number crunching.

Work them in… and America’s true debt may rise to an obscene $210 trillion.

“The pen shrinks to write, the heart sickens to conceive” the enormity of the coming migraine.

Such obscene debt obligation cannot possibly be met. And debts that cannot be paid… will not be paid.

We cannot “grow” our way out of it.

Meantime, America labors under record student loan debt, credit card debt, auto debt, mortgage debt, corporate and state and local government debt.

Again we ask: Is there a way out? Can the economy unload its impossible cargo of debt?

Hyperinflation

One way out — or partial way out — is hyperinflation on the scale of a Venezuela.

Inflation lightens debt’s burdens. But a hyperinflation hauls them away altogether.

But hyperinflation is a very rough medicine — worse than the ailment it cures. Besides, the Federal Reserve cannot even wring a sustained 2% (official) inflation from the economy.

How could it bumble into a hyperinflation?

Furthermore, no major Western industrial power has endured hyperinflation in over 50 years.

The United States will not likely be the first.

Is there another way out?

In theory — in theory — there is. But we must furl back the scrolls of time… to the sunrise of civilization.

The 5,000-year Old Solution to America’s Debt?

Here is the answer:

A debt jubilee.

That is, the mass forgiveness of debt.

Heave the ledger book into the fire. Run a blue pen across the red ink. Wipe the tablet entirely (or mostly) clean.

The practice began some 5,000 years distant in ancient Sumer and Babylon… where a new king would delete the people’s debts.

Was it because the new king was a swell fellow? Or because he was a tribune of the proletariat, an ancient Karl Marx?

No. He cleared the books to preserve his hide. He was alert — keenly — to social stability.

An impossibly indebted class was a disgruntled class. And a disgruntled class is a dangerous class.

Economist Michael Hudson is the author of …And Forgive Them Their Debts. From whom:

The idea was to restore the economy to the stability that existed before widespread debts ran up during the preceding ruler’s reign. What was “restored” was an idealized “original” or “normal” state in which nobody owed debts to the palace…

The idea of debt amnesties was to prevent debt from tearing society apart — to prevent the kind of crisis that the United States has been in since 2008, when President Obama didn’t cancel the junk-bond debts, or the debts that tore the Greek economy apart —  when the IMF and Europe imposed them on Greece instead of letting it default on debts owed to French and German bondholders.

More:

Recognizing that a backlog of debts had accrued that could not be paid out of current production, rulers gave priority to preserving an economy in which citizens could provide for their basic needs on their own land while paying taxes, performing their… labor duties and serving in the army…

Even in the normal course of economic life, social balance required writing off debt arrears to the palace, temples or other creditors so as to maintain a free population of families able to provide for their own basic needs… Societies that canceled the debts enjoyed stable growth for thousands of years.

The debt jubilee was smuggled into Judaic law… and the Bible. Every 50th year would be a jubilee year, says Leviticus:

You shall make the 50th year holy, and proclaim liberty throughout the land to all its inhabitants. It shall be a jubilee to you; and each of you shall return to his own property, and each of you shall return to his family.

Now come home…

Might these United States witness a debt jubilee? After all, the average American sags under $38,000 of debt… or some such.

Already cries arise for a debt jubilee of sorts. Democratic presidential candidates — for example — have announced intentions to forgive student debt.

Four Prerequisites for an American Debt Jubilee

Porter Stansberry of Agora’s Stansberry Research has canvassed the history. He identifies four requisite elements of an American jubilee:

  1. The wealth gap must be getting dramatically bigger.
  2. There must be cultural threats from those with different values or from outsiders (in other words, minority populations and immigrants).
  3. The government must be ineffective at providing solutions.
  4. And there must be growing anger toward the “elites.”

We append no comment.

Clearing away all the deadweight sitting on the economy is perhaps the way to renewed American prosperity.

The economy can then proceed on solid foundations of capital, unencumbered and unbridled by debt… like a stallion suddenly freed from the barn.

Of course, any such jubilee would bring consequences.

It would peel back the lid on a can of wriggling worms…

The Fallout

What about all the creditors a jubilee would clean out? Not all are villain Wall Street banks. Must they all go scratching?

And what of moral hazard?

Who would not load up on debt? After all, someone will one day lift it off your shoulders.

And who would loan anyone money at all — knowing one day he may be fleeced, dragooned and clubbed — and holding an empty bag.

That is, a debt jubilee would tilt the delicate balance between creditor and debtor.

In conclusion, we expect no jubilee of the sort here envisioned.

But we do expect a jubilee… of a sort. Only this jubilee will bring little jubilance.

It will arrive with the next recession. It will wipe out trillions of creaking corporate and personal debt.

It will also sink the economy. And only the avenging gods will rejoice…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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“Stop Worrying and Love The Deficit”

This post “Stop Worrying and Love The Deficit” appeared first on Daily Reckoning.

The prettiest plums dangle tantalizingly before us…

Universal Medicare, a Green New Deal, tuitionless college, guaranteed employment at a minimum $15 per — all are within grasp.

Cowardly Democrats need only summon their courage… and seize them.

This we learn from progressive Marshall Auerback, scribbling piously in The Nation.

From “Why Democrats Need To Stop Worrying And Love The Deficit”:

Delivering on big progressive ideas like Medicare for All and the Green New Deal will never happen until Democrats get over their fear of red ink.

This fellow continues in the same sweet, soaring… and foolish melody:

Progressives could do worse than embrace the sentiment… that “extremism in the defense of liberty is no vice, and…moderation in the pursuit of justice is no virtue”… progressives should be mindful that deficit spending in the pursuit of a prosperous economy that works for all is no vice, and fiscal moderation in the pursuit of social justice is clearly no virtue.

Here, in one gorgeous paragraph, we find the distilled hopes and dreams of our world…

The Modern Pursuit of Alchemy

These hopes and dreams are:

That the alchemy of lead into gold is real, that the print press unchains prosperity…

That the free lunch has actual existence and that Say’s law — that supply creates its own demand — does not.

In words other, that something can truly be gotten from nothing.

1,000 times slain, strangled, murdered, lowered six feet down… 1,001 times this gorgeous fiction has risen six feet up, alive.

And why not?

What is more tempting than heaven without hell, pleasure without pain, wealth without work?

Indeed, what is more tempting than something for nothing?

Individuals, business and governments, all hear the siren’s beautiful cry.

But none is driven madder — none is lured so unerringly to the rocks — than the government of the United States…

De‌bt Binds Most Governments

All governments incline naturally to de‌bt, as all governments incline naturally to roguery and rascality.

But most governments are limited in the amount of de‌bt they can pile up… and thus limited in the swinishness they can get up to.

That is because extreme inde‌btedness would ultimately bring creditors down upon them.

These creditors would question these governments’ ability to make good on their de‌bts.

Interest rates would soar. And the cost of de‌bt would weigh upon the issuing government… as a millstone around the neck weighs upon the posture.

These governments cannot print their way out without sinking their own currencies. Hence they are boxed in.

But the United States government is unlike most governments. For it enjoys the “exorbitant privilege”…

A License to Print Nearly Unlimited Money

The United States fields the world’s premier reserve currency. And the world runs a bottomless appetite for its dollars.

Up to 80% of all international trade is invoiced in dollars. And nearly 40% of the world’s de‌bt is issued in these same dollars.

The United States can therefore run the presses at a clip truly astonishing, without fear of overissue.

And despite America’s heroic go at the print press, its debt has scarcely cost less.

Current yields on its 10-year Treasury bond scrape along under 2%. Yields on its 30-year Treasury run barely higher.

De‌bt has therefore proven a painless gain, a windfall, a wholesale blessing.

Tally the advantages de‌bt offers the United States government…

And it can no more resist de‌bt’s pull than a cat can resist catnip, a bee can resist honey… or a moth can resist the flames.

Toward these flames the United States is likely going. Here is the largest trouble with its de‌bt:

It is largely unproductive.

Keynes’ Warning

John Maynard Keynes put the theory of deficit spending into general circulation. The magic of deficit spending can revive the animal spirits… and set the idle machinery of industry whirring.

But deficit spending was not an open-ended warrant for government extravagance.

As Mr. Lance Roberts of Real Inves‌tment Advice reminds us, Keynes placed a hard condition upon it…

Keynes insisted each dollar of de‌bt give off an economic bang.

That is, Keynes wagged his finger… and insisted that each dollar of de‌bt yield a positive return on investment.

Roberts:

John Maynard Keynes’ was correct in his theory that in order for government “deficit” spending to be effective, the “payback” from investments being made through de‌bt must yield a higher rate of return than the de‌bt used to fund it.

But the vast majority of United States government spending fails Lord Keynes’ exacting test.

“Country A” vs. “Country B”

The United States government appeared before the cre‌dit markets last year, held out its hat … and borrowed $986 billion to make its funding shortage good.

But the lion’s take of these borrowings went to “social welfare” and to service existing de‌bt.

That is, it went largely to non-productive uses. And so it brought down… rather than lifted up.

Here Roberts cites Woody Brock’s American Gridlock:

Country A spends $4 Trillion with receipts of $3 Trillion. This leaves Country A with a $1 Trillion deficit. In order to make up the difference between the spending and the income, the Treasury must issue $1 Trillion in new de‌bt. That new de‌bt is used to cover the excess expenditures but generates no income leaving a future hole that must be filled.

Country B spends $4 Trillion and receives $3 Trillion income. However, the $1 Trillion of excess, which was financed by de‌bt, was invested into projects, infrastructure, that produced a positive rate of return. There is no deficit as the rate of return on the investment funds the “deficit” over time.

The United States is not “Country B.”

And as Roberts reminds us:

As this money is used for servicing de‌bt, entitlements, and welfare, instead of productive endeavors, there is no question that high de‌bt-to-GDP ratios reduce economic prosperity over time. In turn, the Government tries to fix the “economic problem” by adding on more “de‌bt.

Russian Roulette

Evidence indicates any de‌bt-to-GDP ratio above 60% courts risk. Any ratio above 90% plays roulette of the Russian sort.

What is the United States’ de‌bt-to-GDP ratio?

106%.

Meantime, real United States GDP growth averaged 4.3% following each post-WWII recession through the end of the century.

Yet since the end of  the Great Recession — after the government piled up trillions of de‌bt — real GDP growth has averaged a mere 2.16%.

Like a tick infinitely and obscenely engorged by blood, the American economy is infinitely and obscenely engorged by de‌bt.

And as this grotesque insect Dracula has little capacity to expand… the American economy has little capacity to expand.

Next comes this question:

How heavily has de‌bt’s dead weight sat upon the American economy?

De‌bt’s Drag on the Economy

Roberts had a go at the numbers:

Another way to view the impact of de‌bt on the economy is to look at what “de‌bt-free” economic growth would be.

For the 30-year period, from 1952 to 1982, the economic surplus fostered a rising economic growth rate which averaged roughly 8% during that period.

And today?

Today, with the economy expected to grow at just 2% over the long-term, the economic deficit has never been greater. If you subtract the de‌bt, there has not been any organic economic growth since 1990… In other words, without de‌bt, there has been no organic economic growth.

No organic, de‌bt-free growth since 1990 — can you imagine it?

And why should it turn around now?

De‌bt stacks higher and higher. But GDP sinks lower…

2018 growth came it a serviceable 2.9%.

But Morgan Stanley forecasts real U.S. GDP growth will recede to 2.3% this year… and 1.8% in 2020.

Is There a Way Out?

Naturally and of course the Modern Monetary Theory crew has an answer:

To plunge deeper and deeper into de‌bt… on the belief it will bring us higher and higher up.

We believe precisely the opposite.

But is there a way out? Is there a solution to restore genuine American growth?

Tune in tomorrow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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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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John Rubino over at Dollar Collapse – Mon 9 Dec, 2019

What is actually forcing the Fed into the repo market?

John Rubino joins me for a look into the repo market and what is making the Fed continue to inject money. There have been a lot of differing thoughts on what is causing these issues. This also ties into a discussion on debt and how the financial system is stuck on needing more and more to keep functioning.

Click here to visit John’s site and follow along with what he is writing.

John Rubino over at Dollar Collapse – Mon 7 Oct, 2019

Investors Are Correct To Worry About Debt and Low Interest Rates

John Rubino, Founder of the Dollar Collapse website joins me today to discuss why he is concerned about the balance between rising debt and falling interest rates. This all comes on the back of the weak data this morning out of Germany and all last week from the US.

Click here to visit John’s site.

The Big 4 Retirement Worries and How to Beat Them

This post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

The #1 concern most Americans have when it comes to retirement is paying for health care.

According to a recent survey from Merrill Lynch and Age Wave, those age 65 and over ranked health as their greatest source of worry.

With rising health care costs and longer life expectancies, it’s no wonder covering medical expenses tops most retirees list of retirement worries.

Add to that an unpredictable future for our Social Security system, market corrections, and uncertain taxes, it’s reasonable to feel a bit on edge these days.

However, Americans do retire successfully. Studies tend to show current retirees being less concerned about these issues than those approaching retirement. They have the benefit of experience, I guess.

Although I can’t predict your future, a bit of insight and planning can still go a long way to help ease some of your retirement worries.

So today, I’m going to debunk four of the biggest worries nearly all retirees have on their mind.

Retirement Worry #1: Health Care

You see healthcare top many retirement lists and studies as a major concern because many health issues are age related.

While you can’t control your genetic makeup, you can make good choices when it comes to eating healthy and exercising regularly. In addition, I find simply giving people their options when it comes to healthcare coverage can ease a lot of the uncertainty.

Here are the basics…

Most people become eligible for Medicare when they turn 65. Medicare is made up of several parts.

Medicare Part A is hospital coverage. It’s generally free, with some exceptions.

Medicare Part B is medical insurance, and you pay a premium for coverage.

Medicare Part C, aka Medicare Advantage, is an optional replacement for traditional Medicare. You might pay more for an optional Part C plan.

Medicare Part D is your prescription drug coverage. Pard D costs will vary.

So unless your prior employer has your health insurance covered for life, you’ll most likely go onto Medicare.

Choosing the right plan depends on your health status, family history, and budget. It’s also not a bad idea to consider a Medicare Supplement plan, or a Medigap policy.

A major reason to consider a Medigap policy is if you plan on traveling.

Traditional Medicare doesn’t cover you when you travel outside the U.S. But, most Medigap policies do.

The last thing you should consider is long-term care insurance. The data isn’t pretty. Coverage is expensive and your alternative of no coverage can be worse.

The main things to consider here are whether or not your assets are needed for someone else to maintain a certain standard of living. And, whether or not you’re looking to leave a legacy.

Those are two major questions you need to ask before you consider long-term care insurance.

Retirement Worry #2: Outliving Your Money

The second biggest worry is fear of running out of money. With longer life expectancies and rising costs, the amount of money it takes to maintain a comfortable standard of living in retirement is significant.

Step one is to figure out how much you’ll need saved to retire comfortably. You can do this a number of ways but my suggestion would be to find a few different retirement calculators and run the numbers.

Once you have a few different sets of numbers, choose the worst case scenario and build your savings plan around that number.

The sooner you know how much you should have saved the better. Sometimes it can seem like a pension, Social Security and some modest savings will be enough. But that isn’t always the case.

Inflation and other uncontrollable factors can quickly eat away at your savings. It’s important to keep your spending to a minimum early in retirement, this way you give your money time to grow and you’ll have extra saved should you run into trouble later on.

Retirement Worry #3: Not Enough Cash Flow

This worry might seem similar to the second, but it comes from a different place. A lot retirees worry that their income won’t be enough to cover basic living expenses.

The fate of Social Security is up in the air. It likely won’t disappear but it could be significantly reduced, leaving a lot of retirees struggling to pay their bills.

The fix here is putting in place a solid drawdown strategy. The most common strategy is the 4% rule, where you withdraw 4% of your savings in the first year of retirement, and each year after that you take out the same dollar amount, plus an inflation adjustment.

For example, if you have $1,000,000 in retirement savings, the first year you would withdraw $40,000. Then, over the course of that year, inflation runs 3%. The next year, you’d withdraw $41,200.

There are a number of different drawdown strategies, the point being that having a sufficient cash flow is critical in retirement.

Retirement Worry #4: Debt

The last big worry is paying down debt. This worry probably wouldn’t have topped the list 20 years ago. But today retirees carry a lot more debt.

Bigger mortgages, multiple credit cards — it’s a major issue that retirees face. It’s not that you can’t ever have debt in retirement, but you need to be able to manage it.

If you can, pay off your credit cards before you retire. You don’t want your retirement savings getting eaten up by high-interest payments.

In some cases, you’ll want to go into debt. Maybe you need to replace your vehicle and the interest payments are low enough that it makes sense to take out a car loan.

You might also downsize or buy a second vacation property with a mortgage. So long as you’re not relying on debt to fund your retirement and you have a plan in place to manage the debt you owe, you can overcome this worry.

The bottom line is that it’s natural to feel some anxiety about retirement. With the right plan is place and a grasp on what’s to come, you can mitigate most of your fears fairly easily.

To a richer life,

Nilus Mattive

Nilus Mattive

The post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

The Big 4 Retirement Worries and How to Beat Them

This post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

The #1 concern most Americans have when it comes to retirement is paying for health care.

According to a recent survey from Merrill Lynch and Age Wave, those age 65 and over ranked health as their greatest source of worry.

With rising health care costs and longer life expectancies, it’s no wonder covering medical expenses tops most retirees list of retirement worries.

Add to that an unpredictable future for our Social Security system, market corrections, and uncertain taxes, it’s reasonable to feel a bit on edge these days.

However, Americans do retire successfully. Studies tend to show current retirees being less concerned about these issues than those approaching retirement. They have the benefit of experience, I guess.

Although I can’t predict your future, a bit of insight and planning can still go a long way to help ease some of your retirement worries.

So today, I’m going to debunk four of the biggest worries nearly all retirees have on their mind.

Retirement Worry #1: Health Care

You see healthcare top many retirement lists and studies as a major concern because many health issues are age related.

While you can’t control your genetic makeup, you can make good choices when it comes to eating healthy and exercising regularly. In addition, I find simply giving people their options when it comes to healthcare coverage can ease a lot of the uncertainty.

Here are the basics…

Most people become eligible for Medicare when they turn 65. Medicare is made up of several parts.

Medicare Part A is hospital coverage. It’s generally free, with some exceptions.

Medicare Part B is medical insurance, and you pay a premium for coverage.

Medicare Part C, aka Medicare Advantage, is an optional replacement for traditional Medicare. You might pay more for an optional Part C plan.

Medicare Part D is your prescription drug coverage. Pard D costs will vary.

So unless your prior employer has your health insurance covered for life, you’ll most likely go onto Medicare.

Choosing the right plan depends on your health status, family history, and budget. It’s also not a bad idea to consider a Medicare Supplement plan, or a Medigap policy.

A major reason to consider a Medigap policy is if you plan on traveling.

Traditional Medicare doesn’t cover you when you travel outside the U.S. But, most Medigap policies do.

The last thing you should consider is long-term care insurance. The data isn’t pretty. Coverage is expensive and your alternative of no coverage can be worse.

The main things to consider here are whether or not your assets are needed for someone else to maintain a certain standard of living. And, whether or not you’re looking to leave a legacy.

Those are two major questions you need to ask before you consider long-term care insurance.

Retirement Worry #2: Outliving Your Money

The second biggest worry is fear of running out of money. With longer life expectancies and rising costs, the amount of money it takes to maintain a comfortable standard of living in retirement is significant.

Step one is to figure out how much you’ll need saved to retire comfortably. You can do this a number of ways but my suggestion would be to find a few different retirement calculators and run the numbers.

Once you have a few different sets of numbers, choose the worst case scenario and build your savings plan around that number.

The sooner you know how much you should have saved the better. Sometimes it can seem like a pension, Social Security and some modest savings will be enough. But that isn’t always the case.

Inflation and other uncontrollable factors can quickly eat away at your savings. It’s important to keep your spending to a minimum early in retirement, this way you give your money time to grow and you’ll have extra saved should you run into trouble later on.

Retirement Worry #3: Not Enough Cash Flow

This worry might seem similar to the second, but it comes from a different place. A lot retirees worry that their income won’t be enough to cover basic living expenses.

The fate of Social Security is up in the air. It likely won’t disappear but it could be significantly reduced, leaving a lot of retirees struggling to pay their bills.

The fix here is putting in place a solid drawdown strategy. The most common strategy is the 4% rule, where you withdraw 4% of your savings in the first year of retirement, and each year after that you take out the same dollar amount, plus an inflation adjustment.

For example, if you have $1,000,000 in retirement savings, the first year you would withdraw $40,000. Then, over the course of that year, inflation runs 3%. The next year, you’d withdraw $41,200.

There are a number of different drawdown strategies, the point being that having a sufficient cash flow is critical in retirement.

Retirement Worry #4: Debt

The last big worry is paying down debt. This worry probably wouldn’t have topped the list 20 years ago. But today retirees carry a lot more debt.

Bigger mortgages, multiple credit cards — it’s a major issue that retirees face. It’s not that you can’t ever have debt in retirement, but you need to be able to manage it.

If you can, pay off your credit cards before you retire. You don’t want your retirement savings getting eaten up by high-interest payments.

In some cases, you’ll want to go into debt. Maybe you need to replace your vehicle and the interest payments are low enough that it makes sense to take out a car loan.

You might also downsize or buy a second vacation property with a mortgage. So long as you’re not relying on debt to fund your retirement and you have a plan in place to manage the debt you owe, you can overcome this worry.

The bottom line is that it’s natural to feel some anxiety about retirement. With the right plan is place and a grasp on what’s to come, you can mitigate most of your fears fairly easily.

To a richer life,

Nilus Mattive

Nilus Mattive

The post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

Are You Ready for Another Recession

This post Are You Ready for Another Recession appeared first on Daily Reckoning.

Dear Rich Lifer,

Although the U.S. economy continues to grow and add jobs, talk of the dreaded “R” word is on the rise due to a number of worrying signs.

Yes, I’m talking about a “Recession”.

Between the ongoing trade war with China, an inverted yield curve, and the Federal Reserve lowering short-term borrowing costs, investors are starting to get spooked.

A question I get asked a lot is what should retirees do with their money when a recession is looming?

When the market crashed in 2008, an estimated $2.4 trillion disappeared almost overnight from Americans’ 401(k)s and IRAs.

The fear of losing everything to another recession is sending a lot of investors running for the hills.

However, there are steps you can take today to minimize losses during a recession, no matter your age or financial situation.

Here’s a checklist you can follow so that your investments and savings can weather any financial storm.

1. Start tracking your cash flow.

Step one in preparing for a recession is knowing where you stand. The best way to figure this out is by calculating your cash flow, or how much money you have coming in versus going out.

Knowing what your fixed and variable costs are each month as well as where your income is coming from will relieve some of the uncertainty should there be an economic downturn.

If you’re employed, there’s a high chance that you might get laid off during a recession, so you’ll want to know exactly how long your savings will last.

An easy way to begin tracking cash flow is with free mobile apps, like Mint or Personal Capital. You simply connect your bank accounts to these apps and the software tracks your transactions and categorizes your spending.

This way you know where your money is going each month and you can start setting budget goals or identifying expenses that can easily be cut in the future.

2. Top up your emergency fund.

Your best defense against economic hardship will be a well-funded emergency fund. Rather than rack up high-interest debt, you can tap your savings to cover basic living expenses.

As a general rule-of-thumb, I recommend building an emergency fund of 3-6 months worth of expenses. With talk of a nearing recession, however, it’s best to err on the conservative side.

The reason why an emergency fund is critical is because you’ll need liquid money to keep paying your bills. If you or your spouse lose your job, an emergency fund will come in handy to keep you afloat.

If you’re retired, you won’t have to worry about getting laid off, but you’ll still need an adequate amount of accessible cash in case your retirement accounts or pension take a hit.

3. Pay off outstanding debt.

With talk of a recession happening in the next year or so, it’s a good time to start aggressively paying down any bad debts you owe.

Should a recession strike, you’ll want your income going toward monthly living expenses and not paying the bank.

Plus, if you miss too many payments you could end up wrecking your credit score, which will make your life even more challenging when the economy recovers.

Also, whatever you do, don’t dip into your 401(k) to pay off debt, especially if you’re not yet retired. Start with high-interest debt first, like credit cards and build debt payments directly into your budget so you don’t forget.

4. Rebalance your investment portfolio.

Once you’ve taken care of your emergency fund and paid down any outstanding debts, it’s time to review your investments.

If you’re already retired or close to retirement, you’ll want to mitigate as much risk as possible but still maintain enough growth in your portfolio to pay for living expenses and outpace inflation.

Traditional wisdom of maintaining a 60/40 mix of stocks and bonds is no longer enough diversification.

The reason being that retirees are now living longer, which means your portfolio needs more room for growth. Look to diversify your portfolio to include a wide range of asset classes, like foreign stocks and bonds, this will put you in a better position to endure a downturn.

5. Manage your 401(k) wisely

If times get really tough, it can be tempting to want to sell or make significant alterations to your 401(k). My advice: don’t touch it.

Most likely, your 401(k) is part of your long-term financial plan, which means economic downturns are part of the deal. You don’t want to jeopardize any long-term gains by panic-selling the moment markets start dropping.

Lastly, if you’re not already maxing out your 401(k) contributions or taking advantage of any employer-match programs, make sure you do. That’s your money to keep.

Finally, understand that recessions are a normal part of the economy. They’re cyclical in nature and notoriously hard to predict. Control what you can by heeding the warning signs and preparing best you can.

To a richer life,

Nilus Mattive

Nilus Mattive

The post Are You Ready for Another Recession appeared first on Daily Reckoning.