Currently, our trade deficits continue to rise, and the dollar is strong, so we should expect that trend to continue. We are watching the Euro dip below the dollar, it’s a $.96 today (January 3, 2017). Many emerging markets are under stress with potential trade deals dying on the vine and the incoming Trump Administration threatening to renegotiate everything, including and specifically NAFTA. This will cause a flight to safety for global investors, and that money will come to the US, but as that happens, this money will be looking for a decent ROI and that capital will be put to work – some of it will be banked and thus, money created to be loaned out.
Easy money is nice for growth, but it comes with consequences when the easy money gets too easy, that’s when bad loans are usually in vogue. Right now we have a problem with student loan debt which needs at least a $108 Billion bailout as 42% of the outstanding loans are in technical default, 90-days in the rears. Similarly, the auto loan sector is at a 5.8% delinquent rate – unfortunately, that is about where it was when we bailed out the auto industry last time.
Sure, low interest rates help, and more infusion of money is a good thing, but there we go again with the easy money problem digging ourselves into a bigger hole. Now then, when it comes to the housing sector consider this factoid – there was an interesting piece in CFO Magazine on December 27, 2016 titled; “Home Prices in Major Cities Rise 5.1% in October – Prices are ‘enjoying robust numbers,’ but ‘cannot rise faster than incomes and inflation indefinitely'” By Matthew Heller. The article stated:
“The nationwide index rose 5.6% in October, exceeding its 2006 peak for the first time. ‘Home prices and the economy are both enjoying robust numbers,’ however, mortgage interest rates rose in November and are expected to rise further as home prices continue to outpace gains in wages and personal income.”
All we need for all hell to break loose is a down-tick or small recession, interest rate rise, and a hick-up or stock market correction, which many stock analysts say is way overdue because of the outrageous PE ratios rivaling the 2000 Dot Com Bubble burst. Scared yet? Well, it’s an unknown, it’s hard to advise anyone if they should be worried today, but this trend is setting us up for failure and we need to be very careful how we play it moving forward. Please think on this.