Juggling Dynamite

Before the election, Trump warned that the stock market was in a Fed created bubble and was heading for a big crash, now he is tweeting that prices have risen another 10% and it is all thanks to him!

The world was gloomy before I won – there was no hope. Now the market is up nearly 10% and Christmas spending is over a trillion dollars!

— Donald J. Trump (@realDonaldTrump) December 26, 2016

 

The U.S. Consumer Confidence Index for December surged nearly four points to 113.7, THE HIGHEST LEVEL IN MORE THAN 15 YEARS! Thanks Donald!

— Donald J. Trump (@realDonaldTrump) December 28, 2016

Unfortunately large asset bubbles, reckless spending on debt and blind, irrational, over-confidence, are the problems not the solution…Thanks Donald indeed.

Overly confident consumers lead us to recession…h/t ZH. pic.twitter.com/M8cuNKrJGW

— Cory Venable CMT (@CoryLVenable) December 27, 2016

This is what happens when a system becomes all about enriching executives and lenders, and leaves the rest of the population dependent on debt to try and stay afloat.  The cost to the economy in lost savings, investment and spending power for everything else is massive, and the deficits and shortfalls compound for years into the future.

The answer is not more loans, and lower rates and more government subsidies to for-profit-corporations; the answer is more affordable, efficient programs and systems that cost less and enrich the masses with better health, education and self-sufficiency.  Investments in the present, pay it forward for a stronger future.  But investment requires lower profits and consumption in the short-run.

Note to status quo:  you don’t empower the future by taking advantage of the vulnerable when they are looking for help to get started.  See The next victims of student debt crisis: mom and dad:

In 2016, more than 3.3 million borrowers held $74.5 billion in parent PLUS loans used to pay for their children’s education, according to the U.S. Department of Education. That implies the average parent PLUS borrower had a balance of more than $22,000.

The College Board found that annual parent PLUS loan volume has increased nearly fivefold over the past decade.

As long as parents do not have poor credit, they can borrow as much as they need in parent PLUS loans to cover their children’s tuition, room, board and books minus the financial aid the student receives.

“The biggest issue with parent PLUS loans is the underwriting doesn’t take into account affordability,” said Nick Clements, co-founder of MagnifyMoney.com, a loan comparison website.

Here is a direct video link.

Alberta and Saskatchewan are the only two Canadian provinces that allow underwater homeowners to leave keys for the bank and “walk away” from their mortgage obligations without further recourse or damage to their credit rating.  But this option is not available for those who bought with less than 20% down and bought taxpayer-backed mortgage default insurance to complete the purchase.   Insured borrowers are typically sued by CMHC or Genworth to recover any shortfall between the resale price of the home and the outstanding principle, interest, admin and legal fees.  On a default, compound interest costs and fees tend to escalate quickly eating up any equity the owner may have once had in the house.  Foreclosure sales also tend to be depressing of market values even for those who are maintaining their payments.  See:  Surviving foreclosure in Alberta:  “I thought I could do it”.  Alberta offers a cautionary tale for the perils of highly leveraged, over-valued real estate across Canada:

A recent survey by Manulife Financial found a third of respondents would have difficulty making their monthly payments after three months if the family’s main earner lost his or her job. One in six said they would have trouble making mortgage payments if interest rates rise…Another survey earlier this year by Ipsos Reid found nearly half of Canadians were $200 a month away from being unable to pay their bills and other debts.

Human life is full of great risk.  Health problems, accidents, breakups, job losses and  economic downturns are all regularly recurring events.  The mean reversion of over-exuberant asset prices that have been enabled by debt is not random, bad luck, but rather a normal, foreseeable part of the credit cycle.  The longer the rising phase, the deeper or longer the mean reverting phase. Wise people plan for the downturns, foolish people hope they won’t happen.