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Money Update End of summer! READ August 21, 2016

 

 

Hello Money Matters fans!

The end of summer approaches. Here are a few money articles for you to read over to get your mind thinking as we march into the late summer. 

Before we march in to the money stuff, I want to remind you that another Money Matters show airs first Thursday in September so that is 8th, noon PST so tune in. Our topic will be "Will we fall in the fall".

Markets have done bad things occasionally in the fall season. Will we have a repeat? Tune in! All past shows are available for download at no cost. 

 

Food for thought: "Where you go in life depends a lot on who you hitch your cart to"

 

I was invited to go to a summer BBQ loaded with VIPS to hob nob, shake hands, endorse and otherwise show my mug at the event.  I met a lot of fans and got a chance to hear some great feedback on my show and articles. I also took the oppurtunity to hitch my son, Kyle, up to some important contacts. Here is Kyle again with both a Congressman and Senator. I managed to fanangle a private tour and lunch at the Capitol in Sacramento with the Senator, one on one, just him and Kyle, with Dad thanking the Senator for making this happen. A great set up for my boy that will happen in September. I also met several elected officials which included some school board members, the head of  the Sheriff Department, an NID official, and the Senator and a Congressman, to name a few. I was asked to add my endorsement to a school board candidate which I gladly did after hearing her views on what she would do to help our kids. I shook a lot of hands and placed some ace cards in my pocket for future use. Yes I did..........

 

Hook your cart to successful people and go places! 

 

 

 

Kyle and the Senator-  A one on one lunch was set shortly thereafter with the Senator including a tour at the Capitol next month.

 

Now on to the money stuff!

 

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When debts become too burdensome to an economy in relation to historical averages, I call this occurrence/environment a “negative credit cycle”.

 

Some analysts might refer to it as a “credit-default” cycle. Sounds confusing but just think of it as a time when companies, individuals, municipalities, states and even entire countries have a harder time paying their bills. Defaults on IOU’s like bonds and notes start to rise and interest rates begin to reflect that rise in defaults by rising as well. This increase in rates reflects lenders demanding more interest as they begin to worry about being paid back when things turn south.

 

Look back at 2008/2009 for an example of a major negative credit cycle. There are minor negative credit cycles, major events and all points in between.

 

Is a new negative credit cycle beginning and if so how bad will it be?

 

According to Standard and Poor’s credit monitoring service, global credit defaults hit 100 meaning that a relatively high number of large corporations defaulted on what they owed.

 

That’s about 154 billion worth of debts may not be paid.

 

That figure is 50% higher than this time last year. Moodys, the other heavy weight credit analyzing company, estimates noninvestment grade debt will hit a default rate of over 6% by year end. At that pace, more than 200 good sized companies will go bankrupt by years end and that will surpass the previous all-time high set in 2009.

 

If that year sounds familiar, that was at the height of the credit crisis and banking blow up.

 

Simply put, if the Moody’s forecast is correct, conditions in the corporate credit markets will be worse this year than in 2009, and it was awful bad back then if you recall.

 

How big will the total default figure be?

 

Marty Fridson, called the “Dean” of corporate debt in New York, predicts a default figure nearing 2 trillion. That’s trillion with a “T”.

 

All this is happening strangely enough as the Dow is flirting with all-time highs, actually setting an all-time high just a week back.

 

So apparently we have a contradiction in the equity markets. Bond markets look to be bleeding red if Standard and Poors and Moody’s has their way, while stock market participants apparently see everything coming up roses.

 

Which is it?

 

Are we on the verge of a massive negative credit cycle or on the cusp of a new bull market reaching for all-time highs? One of these groups is wrong obviously, as we can’t have it both ways.

 

What does this tell the average investor beside everyone has an opinion, and because they are opinions and not fact, they can differ greatly?

 

It tells us to be cautious no matter what we do. With such differing and widely opposing views, apparently anything can happen and when it does, some folks are going to lose a lot of money while others stand to take that money and run with it.

 

If you don’t know which way to turn, what to buy and what to sell, an investor might consider reviewing their portion of cash in their portfolio in relation to equities. A higher cash position will tend to smooth out the bumps and reduce volatility. As always, consult with your investment professional to discuss options that may be better fit your risk tolerance.

 

 

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The Federal Reserve could potentially raise interest rates as soon as next month, New York Fed President William Dudley said, warning investors that they are underestimating the likelihood of increases in borrowing costs. “We’re edging closer towards the point in time where it will be appropriate, I think, to raise interest rates further,” Dudley, who serves as vice chairman of the rate-setting Federal Open Market Committee, said Tuesday on Fox Business Network. Asked whether the FOMC could vote to raise the benchmark rate at its next meeting Sept. 20-21, Dudley said, “I think it’s possible.”

So here we go again. The markets seem tethered by an invisible thread to what the Feds say and do, but mostly since what they say happens far more frequently then when they actually act, the “Fed Speak” has had tremendous sway on what markets do in its day to day movements.

 

Investors must be scratching their proverbial heads. One day the markets shoot higher on a particular news piece then the bottom falls out on some other news item.

 

It could be argued the markets react on both fundamental news and non-fundamental news which means it may not be so tied to what the economy is actually doing but tied to what the Federal Reserve is actually saying.

 

In my father’s day, stock markets generally reflected what was expected to happen in the economy and the businesses in it. More specifically it was said the stock market told us what would happen in advance, like six or nine months in advance. Good business news and growth in earnings bolster investor confidence and subsequently they bought stocks.

 

Fast forward to today, and the markets seem not only concerned about what businesses will do but what the monetary authorities will say and do as well.

 

If businesses have positive growth, investors may perceive the Federal Reserve will raise interest rates, which is what they do to cool off an overheating economy. This fear of rising rates may spur a selloff in stocks, the exact opposite of what traditional stock market reaction would be in the face of good news in the business sector. Conversely if businesses start to suffer, and the economy shows signs of weakening, investors my think the Feds will drop rates, which is generally good for stocks, and the markets may rise despite a poor business environment.

 

Case in point: New York Fed President Dudley’s remarks that rates could rise sooner than expected caused a significant sell off in stocks the day he made his speech. It is indeed a strange world we live in when the markets now react positively to negative business news and react negatively when businesses say they’re doing better.

 

This “opposite reaction” compared to what markets had done in years past may be caused by the Federal Reserve’s hyper activity in the markets of the world as they attempt to steer the economy where they think it should go. As the Feds have increased their activity and involvement in the economy over the decades in their belief they can control such a beast, it could be argued the cure may be worse than the disease.

 

All for now,

Marc

 

Need a financial advisor? Want to talk about your investments? Email me at mcuniberti@cambridgesecure.com.

I need a painter to paint my second story on my house? Know a painter? Email me.

Need deck refinishing?  Painting? My son Kyle will do it at half the cost. Email me

In other words, email me!

 

Jambo!

 

 


 

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