Friday, April 29, 2016

Something wicked this way comes

It's maybe time to get nervous. Rather than tell you lots of stuff, I'll tell you a little and let you click a few links and draw your own conclusions.  I'm not 100% confident that all that is in these links is fully accurate, but even if it is a little bit so, we've got another economic downturn on the way. It will be different from the last one, because the last one was centered in the bubble in the real estate market. This one will be bigger and badder. And I don't mean "bad" meaning "good"...

1. Retail store closings
Ask yourself: Why would so many of these super large chains be closing down so many of their stores? McDonalds? WalMart? This is just the list for this year, by the way. Remember two things: WalMart's method is to drive out all the "mom and pop" stores from an area with their "low low prices" so that the people have no other shopping options. What do people do when WalMart closes? Also, Sears/KMart/Macys are all anchor stores in malls.  When they go out, there is a huge ripple effect. Remember Ames? Remember Bradlees? You can still see the remnants of the malls they used to anchor...filled with weeds and empty storefronts with busted windows.

2. Subprime auto loans are on the rise
You don't even have to read the article. Just look at the graph in the middle. Then think to yourself: "Gee, I wonder if banks/investment houses are packaging this debt and selling it like they do with mortgages?" Yes. Yes they are. And the current default rate on these loans? 12% are 30 days past due, and 30% are more than 60 days past due. The auto industry relies upon steady sales to keep itself alive in this country. High sales=financial health, right? Wrong. Who are they selling these cars to? And who is dumb enough to invest in bundled high risk auto loans? Apparently, our investment banks are.

3. Inflation rates are starting to move
Yeah, sure, you say. But they aren't moving that much. Right. But they are moving. Why is inflation so low? Because the Fed has been flooding the nation with electronic cash ("quantitative easing," remember?) and keeping interest rates ridiculously low, despite a minor bump Janet Yellen announced a little bit ago. That's the only tool available to curb inflationary pressure: moving interest rates on government bonds. The current interest rate is nearly 0. (I think it is near 0.3% right now...) Some folks see rates as on the way up (see an article here). Why keep rates low? Because mortgages and loans are indexed to the Fed's rate. So if the Fed's rates are low, we get quick and easy money to borrow to pay for our cars and houses...

Why do we need to borrow? Because we need to have money to spend money at stores to keep the economy going strong. But retail stores are closing and laying off workers. So maybe we aren't spending enough money. So the Fed wants rates to stay low, so we will borrow more. And spend more. And be deeper in debt.

Oh, and the banks/investment houses are offering "bespoke tranche opportunities" to investors. These are bundled packages of the debt that you and I incur when we take a loan or get a mortgage. That should sound familiar. They used to be referred to as CDOs, and that practice of bundling them together is what caused the economy to crash in 2008 when too many banks loaned too much money out to too many people who couldn't pay it back. And then they bet against their own investors and the system collapsed.

Just recently the relationship between the long term interest rates and the short term interest rates (this is called the yield curve) were practically flat-lined. A flat yield curve is a concern because it usually presages an inverted yield curve, and that, my friends historically indicates a recession or depression.

Throw in the fact that the Chinese economy is certainly in the toilet, and their currency is really really stressed, (leading the Chinese government to hype nationalism with higher levels of aggression in the South China Sea to distract the Chinese people from their problems...); oil prices are wicked low (good for the gas tank, suuuuper bad for the global economy), the European Union is looking shaky (Brexit, anyone?) and the international scene is not so good.

Taken individually, those are all interesting facts. Put together, well, I'm saying it now and hoping I'm wrong:

Something wicked this way comes....

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