Thursday, November 15th, 2018 MST

Impact of higher interest rates/loose money

The stock markets seem oblivious to the Fed’s stated objective of higher interest rates, with some major averages making new highs and other just shy of new highs.  However, some segments of the economy are already being impacted by higher rates, namely the housing market.

Across the nation, home sales have declined four months in a row.  In July, sales slipped 0.7% to the slowest pace in two years.  According to the AP, sales of homes priced between $100K and $250K have barely budged year-over-year. That’s because homeowners in houses valued at $100K or less cannot afford to move up due to wages/earnings not keeping pace with rising home prices and interest rates.

Sales of houses worth more than $500K have jumped in the past year, led by a 16.2% surge in sales valued at more than $1 million.  Further evidence of the growing “income inequality” between wage earners and the well-to-do.  David Stockman is right, the Fed’s money creation is flowing to Wall Street, not Main Street.

Meanwhile, lending institutions are starting to push more risky loans.  Coming out of the Great Recession, lenders were reticent make loans.  Now, with memories of the Great Recessoin fading, they are lending more, with personal loans as large as $100K being their targets.

In the first six months of this year, personal loans grew to $81.9 billion — small compared to other lending activities — but up 13% over the same period last year.  And, a record 1.26 billion solicitations were mailed; robo-calls (I receive them weekly.) offer $100K signature loans.

This is fraught with dangers as personal loans are the last stop for people in need of financing, and borrowers often sign up for several loans at once.  Borrowers often end up with more debt than they previously had, not always using the money to pay off other debts.  (Is this another sign that the economy is not as strong as the government is reporting?)

According to the credit reporting company TransUnion, borrowers who took out personal loans recently are falling behind on payments at a faster rate.  Several lenders already are reporting higher losses.

The 2008 Great Recession was brought on when borrowers could not service their debt.  A domino effect was about to collapse major financial institutions, and the Fed went into the printing mode, creating right at $4 trillion to avoid a collapse of the financial system.

The increase in personal loans is small potatoes compared with other lending, but it shows that lending companies are losing the fear that they had coming out of Great Recession.  Another example that lenders are more loose with their money: Last year Argentina issued $2.75 billion 100-year bonds payable in US dollars.  The issue was over-subscribed 3.5 times.

Argentina doesn’t have to worry about paying those bonds for 99  years — and possibly never will pay them — but it shows how loose the money markets are.  Wonder how many equally bad loans lenders have made and will expect the Fed to bail them out?

The loosening lending market is another crack in the economic dam.  All that money could not have been printed without billions of dollars  — maybe trillions of dollars — in bad loans have been made.  Now, we just have to wait on them to surface.

Got gold?  Got silver?  It’s time to make sure that precious metals make up at least 30% of your investment portfolio.

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