FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 19, 2018

1. Over 40 Years of Writing This Newsletter

2. National Debt Not a Problem – We Owe It to Ourselves

3. So How Much Debt is Too Much Debt?

4. Exciting New Investment Opportunity Coming

Overview

Our national debt has swelled to a record $21.16 trillion as of this writing. That includes debt held by the public ($15.4 trillion) and intra-governmental debt ($5.7 trillion). At $21+ trillion, our national debt is well above 100% of our Gross Domestic Product of $19.97 trillion.

While many of us, especially in conservative circles, worry that our out-of-control debt will lead to a devastating financial crisis before long, others tell us there is no need to worry because “we owe this debt to ourselves.”

Yet nothing could be further from the truth! US debt is also owned by foreign governments, offshore institutions and international investors around the world. We don’t just owe it to ourselves. That’s what we’ll talk about today. But first I digress.

Over 40 Years of Writing This Newsletter

About this time each year, I am reminded of when I started writing this newsletter. I have written it continuously for over 40 years, going back to the late 1970s. I started it as a way to communicate regularly with my many clients and prospective clients.

I still remember typing it on an IBM Selectric typewriter back in the day. I had one at the office and another one at home. Some of you are old enough to remember one of those; many of you, probably not. Corrections were a major pain in the rear back then. Think “White Out.”

I remember printing hundreds of newsletter copies, folding them, stuffing envelopes, putting on postage and taking them to the Post Office myself. Today, it’s hard to imagine how I came up with interesting content back then without the Internet, but I did. We all did.

This newsletter has always been my passion and still is. It has had several different titles over the years as the focus changed somewhat in the earlier years. It’s been Forecasts & Trends since the early 2000s and is regularly republished by others.

The challenge for me, as always, is coming up with interesting content to write about each week. To do so, I read an enormous amount of material on a daily basis. Fortunately, I took a speed-reading course in college, and my reading speed exploded from around 250 words per minute (average) to nearly 2,500 words per minute with even higher comprehension.

I cannot recommend a speed-reading course more highly to everyone seeing this. Speed-reading courses are widely available today, relatively inexpensive and you can triple your reading speed (or more) in just weeks or months. I highly recommend it no matter what your age!

Well, enough nostalgia, let’s move on to our topic for today.

National Debt Not a Problem – We Owe It to Ourselves

Liberals in general favor bigger government and therefore increased federal spending year after year. In fairness, many conservatives do the same thing in practice. Take the current bunch of Republicans in charge of Congress and the White House – they’ve spent more money every single year since taking control.

So, I’m not singling out liberals or Democrats here. I’m talking about politicians in general.

Here’s the point. There is a misconception in Washington that the national debt doesn’t really matter because we owe it to ourselves. That might be true if all of our federal debt was owned by Americans and American institutions. But that is not the case! Let’s take a look.

As I pointed out at the beginning, of our national debt of $21.2 trillion, $15.4 trillion of that is “debt held by the public.” Of that $15.4 trillion, apprx. $6.2 trillion (over 40%) is owned by foreign governments, offshore institutions and international investors.

These foreign investors are under no obligation to hold over 40% of our debt held by the public in US Treasury securities (t-bonds, notes and bills). They can sell that debt at any time.

An argument can be made, of course, that foreigners are not likely to dump their Treasury holdings on a large scale because US debt is still regarded by many as the safest asset on the planet, and where else would they put the money? 

That being said, if these foreign investors ever get worried about the “full faith and credit” of the United States, there is little doubt they would consider bolting from Treasury securities and the US dollar. There is little disagreement about that.

So How Much Debt is Too Much Debt?

In the spirit of full disclosure, I have been warning about our federal debt for over 30 years now. I was worried about it before it reached $5 trillion. I was very concerned as we topped $10 trillion. And $15 trillion and $20 trillion.

Unlike New York Times columnist and Nobel Prize-winning economist Paul Krugman – who believes there is no limit to federal debt because we owe it to ourselves – I’m like a broken record. I still believe there is a limit when foreigners will decide to unload our debt. And there is mounting evidence that we are approaching that limit.

My point today is this: we don’t just owe our federal debt to ourselves. Over 40% of our public debt is held by foreigners. They can sell at any time.

Will that happen anytime soon? Maybe, maybe not. But no one knows when they decide the US has too much debt. It will be ugly when they do!

Are We Headed For Another Consumer Debt Crisis?

Although the labor market added a better-than-expected 223,000 jobs in May, robust wage growth again proved elusive with an increase of just 2.7% on an annualized rate. Recent data indicates that more Americans are starting to struggle financially, suggesting that workers may have added debt to their household balance sheets because they expected to be earning more by now.

Payment delinquencies have ticked up in retail credit cards this year, which typically have a lower bar for acceptance than general-purpose cards, and in car loans to people with subprime credit scores. The percentage of private-label retail credit card bills unpaid for 60 days or more is 4.65%, a seven-year high, according to credit bureau Equifax.

The amount of outstanding auto loan debt unpaid for 60 days or more has risen by more than 5% in the last year. A subset of auto lenders concentrated in the subprime space has been hit especially hard after expanding their activities to include more “deep subprime” borrowers.

Consumers added $63 billion in debt in the 1Q of this year and owed a collective $13.21 trillion as of March 31, according to the Federal Reserve, and more of them appear to be having trouble servicing that debt. According to a separate Fed report, the number of people who have fallen behind on their credit card payments for 90 days or more has increased “notably” from a year ago, and car loan payments overdue by 90 days or more have been on the rise for more than five years.

According to the National Foundation for Credit Counseling’s annual financial literacy survey, nearly 40% of Americans carry revolving credit card balances. A quarter of respondents told surveyors they don’t pay these bills on time, and nearly 10% have debt in collections. Both figures are higher than last year by 3 percentage points.

While consumer credit experts are quick to point out that none of the metrics on debt and delinquency are as dire today as they were in the throes of the Great Recession, they concede that the increases are worrisome. It’s noteworthy because we’re far enough along in the economic expansion that consumers should be in much better shape financially.

The problem is that the recovery’s economic gains and the recent tax cuts haven’t been equally shared among Americans. Six months into a historic tax cut for businesses, workers aren’t seeing the kinds of pay increases its political backers said would follow. A Morgan Stanley survey found that just 13% of the current corporate tax cut windfall is going to increased worker pay, benefits or other compensation.

While the current situation may not qualify as a new consumer credit crisis just yet, the trend is troubling. According to the National Foundation for Credit Counseling, over 40% of US households are living paycheck to paycheck.

Meanwhile, interest rates are set to rise in the months ahead, and this will make it even more difficult for families to make ends meet – unless wages begin to rise in the second half of this year. Fortunately, there are some reasons to expect this will happen, but most employers are resisting the pressure to increase wages, especially for low-skilled workers.

It will be very interesting to see how this plays out. I’ll keep you posted.

Exciting New Investment Opportunity Coming Next Week

Our Chief Compliance Officer just returned from an on-site due diligence visit with an exciting professional money manager that we will be introducing to you next week. This strategy invests in short-term real estate loans (generally less than a year) with a maximum of 65% Loan-to-Value (LTV) ratio. In addition, they do not use leverage, which can be a huge advantage in the event of a downturn in the economy. 

The strategy invests in three different regions of the country – regions they feel offer the most potential for growth. Their track record is very impressive and spans nearly 7½ years (no guarantees for the future of course). This strategy is only available to accredited investors.

Don’t miss next week’s E-Letter where I will give you a lot more details about this unique strategy that you should consider for your portfolio if you are accredited. Since it invests in real estate loans, it is not highly correlated to the stock market, which can be a helpful tool for diversification. Stay tuned for more information next week.

All the best,

Gary D. Halbert

SPECIAL ARTICLES

Why Paul Krugman is Wrong About the National Debt

U.S National Debt Adds $1 Trillion in Only 6 Months’ Time

U.S. Debt Clock in Real Time

Gary's Between the Lines Blog: Fed: Economy Strong Enough For Even More Rate Hikes

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