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The Debt Trap Are we in it ? Update 2 28 2021

Too deep a hole to climb out!

The debt trap

Stimulus and bailouts cost money. Not that you will get an invoice, mind you. Although that argument has been put forth. Issue an invoice for government spending on an itemized bill to every working American and it is argued we would see fewer military excursions, fewer social programs and fewer bailouts.

The reasoning for government spending is either for defense, improving the greater good by whatever method, or addressing an economically stressing event like COVID-19. The term often used is the government borrows in order to spend so we “grow our way out” of an economic problem.

When the government spends money, it either borrows it, taxes it or creates it.

The Federal Reserve creates money, and then loans it to the Treasury in exchange for IOU’s.

Since the Federal Reserve is a quasi-government agency, the borrowing is more like a bookkeeping entry than an actual lender and borrower. The Treasury is supposed to pay it back to the Federal Reserve, but in actuality has been running up the tab for decades. That “tab” is called the U.S. debt, and it stands at about 23.3 trillion (look up the U.S. debt clock webpage for a sobering moment).

The debt doesn’t include what is called unfunded liabilities. Unfunded liabilities is not what we owe right now, but what we promise to pay sometime in the future. Examples of these might be pensions or bills that come due in the future but are not due yet.

The United State’s unfunded liabilities are so large a number, the estimates vary depending on whom you ask. Wikipedia pegs the official figure at 43 trillion while Forbes clocks the figure at 210 trillion.

The argument for government spending revolves around the concept of return on investment. Borrow a buck and plow it into the economy and it will generate more than a buck in return. The return might come from a factory that is built or some kind of other investment that returns more money to the economy than the original dollar borrowed, as measured by U.S. Gross Domestic Product (GDP).

Continue to borrow, however, and the risk of a debt trap materializes. The term “debt trap” was originated by the Bank for International Settlements.

As long as the return is positive, a government can continue to borrow. Simply put, if every borrowed dollar yields more than a dollar, any new borrowing will grow an economy by more than a dollar, enabling the dollar to be paid back while the residual stays in the economy. The more money borrowed, the more the economy grows. Continue to borrow and the interest to service the debt continues to grow. Much like someone endlessly running up credit cards, eventually the principal cannot be paid as the interest continues to grow as more money is borrowed.

The debt trap occurs when each dollar borrowed by a government yields less than a dollar in benefit. Instead of getting more back than what is borrowed, the return is less than what is borrowed. This is the exact opposite of what occurs when the return is positive and the economy benefits. Instead, the debt trap is when the yield goes negative and for every dollar borrowed, less than a dollar is produced in the economy and for every dollar borrowed, the economy now shrinks.

Think of it like transferring water using a bucket with a hole in it. The more you use it, the more water you lose. The same goes with a debt trap. For every dollar borrowed, the economy gets worse. While that occurs, however, the debt and its interest continues to increase. To stay afloat, the need to borrow more accelerates. As more is borrowed, more is lost.

Hence the trap. You cannot go forward and borrow more without making the situation worse, yet the debt cannot be serviced without additional borrowing.

Opinions vary as to where U.S. debt is in regard to “trap” conditions, but many argue we’re close to it now, while others claim we are well past the point of negative returns and already in the trap.

In summation, the answer from many in government about how to fix the debt problem is to “grow our way out of it.” The problem is we may have already passed the point of no return and be caught in the trap making the situation worse with each passing day.

Opinions expressed here are those of Mr. Cuniberti and may not reflect those of any media outlet. For a list of the services offered by Mr. Cuniberti, call 530-559-1214. California Insurance License #0L34249 and Medicare Agent approved. Email: news@moneymanagementradio.com.

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Stock manias like GAMESTOP and BITCOIN Update 2 20 2021

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With the recent price explosions of both bitcoin and GameStop and until just recently, some stocks in the biotech sector, it may be time to step back and take a look at the broader picture of why these events might be occurring.

It really doesn’t matter what the asset is. Instead, we should see if there is something more in play here than some stocks whose prices keep going up.

These types of explosive price moves certainly make for great headlines. Seeing a stock gain five, ten or fifteen percent day after day is rare, but when it happens, it attracts investors like flies to fodder.

It is more common to see price moves like this during over-heated and extended stock markets then to witness them during a crash phase. Think back to the dot.com era and investors saw similar astonishing gains during that mania as well.

We all know how that ended.

Simply put, when some crazy stock rallies like a rocket ship, some people make money. Usually the early arrivals to the stock party. Many of these events can go on much longer than what may seem reasonable. It is said among professional traders that “markets can stay illogical longer than you can stay liquid”. In other words, a stock that makes amazing gains day in and day out can continue to make these gains for longer than you might think possible. It is what makes these events so magnetic, and why even those late to the party can make some money. The very late arrivals however, usually only see the crash that follows.

What drives these events?

As markets rise, investors experience the euphoria of quick and easy money, and sometimes lots of it. Often the gains happen so fast, the participant starts thinking crazy things like becoming a permanent day trader, retiring at age 30 or setting their sights on nice round number like a million dollars.

Meanwhile “Mr. Market” sits back and grins, as these occasional manias are all in a day’s work. If Mr. Market could talk, it would say, “Wait for it”.

To say most of these events end badly for many is an understatement. The only thing that destroys more money faster than a stock mania is a Ponzi scheme, or something similar.

More importantly is to understand what is it about investor’s mindset that causes these ballistic rallies to occur in the first place.

With rising markets come loose lips, meaning the more stocks rise, the more money is made, and the more money is made, the more people talk about it. An investor gets to the point where everyone around them is claiming newfound riches and then the “FOMO” mindset (Fear of Missing Out) combines with the “greed’ DNA we all have buried deep within, and the trap is set.

Good sense is then tossed out the window, replaced by an investing APP on their smart phone or by opening up a brokerage account. A deposit check is close behind.

The “buy” button is then pushed, officially signaling a “let the games begin” moment.

Then the fun (or lack of it) begins.

Next time when this urge strikes you , instead of rushing out and investing your rent check or mortgaging your house, realize two things:

Explosive price moves are rare, and even more rare is that they are seldom driven by real fundamentals. It’s just a lot of people like you, all thinking and hoping for the same thing called “the greater fool theory”. Which is to say, some fool (go find a mirror) is buying something they know little about, in hopes another fool comes along (hence the “greater” label) and buys it from you. Just don’t be the last fool to enter the fray, and there will be many. They are the ones that usually get burned.

The second thing to think about, if you’re thinking at all during all of this, is that these types of manic stock buying events usually occur during extremely overbought and hyped up markets.

Which is to say, the market as a whole has probably lost its mind right along with you, and instead of writing a check, it may be time to cash one out instead.

Ignore at your own peril.

Opinions expressed here are those of Mr. Cuniberti and not those of any bank or investment advisory firm. Nothing stated is meant to insure a guarantee, or to be construed as investment advice. Neither Money Management Radio (“Money Matters”) receive, control, access or monitor client funds, accounts, or portfolios. For a list of the services offered by Mr. Cuniberti, call (530)559-1214. California Insurance License #0L34249 and Medicare Agent approved. Insurance services offered independently through Marc Cuniberti and not affiliated with any RIA firm or entity. Email: news@moneymanagementradio.com.

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Money Update INFLATION ON ITS WAY? Update 2 16 2021

Is there inflation in our future?

Depending on what kind of inflation and to what degree makes answering this question a bit more involved than just a yes or no response.

Inflation to most people means the increase in the prices of the things we buy. Why it happens and to what degree it occurs requires we take a little trip through our economic schoolbook.

One might describe inflation as either the fear your dollar will lose value (think Mexican Peso) or something will soon rise in price making it more expensive (think home prices in the mid-2000’s).

We could add a third definition by saying that in lieu of thinking something could cost more later, as in the above home prices example, one could also describe it as the hope something will be worth more later (think Bitcoin) hence turn the owner a profit. A rising bitcoin price is just another form of inflation in the truest sense of the word.

No matter what view applies to your perception of inflation, the concept centers around the same event: a change in price.

Inflation can have many causes, and without getting to deep into the weeds, just know the most common type of inflation is monetary (think money) inflation. This type of inflation can be the most insidious and dangerous type, but it is also a type of inflation that can usually be prevented if there is a will to do so.

Simply put, print a lot of paper dollars in a relatively fast amount of time and put those dollars into circulation and you will likely get monetary inflation. All three conditions must be present to see monetary inflation.

Printing a lot of dollars means just that: creating dollars without regard to restraint.

The timeframe that this printing is accomplished is also a contributing factor. Print copious amounts of currency over centuries and inflation won’t likely be an issue. However print a lot of dollars quickly and the second part of monetary inflation equation is complete. The third part of the equation is the circulation of the newly created dollars. Burying newly created currency in the ground so no one can use it will cause no inflation. The money has to circulate and be used by people in the economy to cause inflation.

Eliminate or avoid any of the three conditions (quantity, timeframe or circulation) and monetary inflation will not occur. Do all three and monetary inflation will eventually occur.

Most people can conceptualize monetary inflation when the Mexican Peso is mentioned, and rightly so. Although many will not be able to put their finger on the exact mechanism of the Peso event, most will grasp the general economic principle at work. The Mexican government printed too many Pesos. They did it over a relatively short amount of time, and the Pesos were distributed and used in the economy by the Mexican people.

Fast forward to the U.S. 2008/9 bailout period. Most analysts expected inflation due to the trillions of dollars created that were used in the bailouts.

We did see some inflation in certain asset areas but for the most part, prices remained stable and actually fell in other areas. What was missing in the three part monetary equation was the circulation variable.

In 2008/9, most of the trillions went into the banking `system` and not to the average everyday consumer. The banking sector dumped questionable loans (think mortgages) onto the backs of the U.S. Federal Reserve Bank (FED) in exchange for cash. The cash then paid off some of the banks’ bad debt and enabled them to continue to function. What is not widely known however is that a good portion of the money was given right back to the FED in exchange for interest payments in a program called Excessive Reserves.

So to be clear, the Fed gave money to the banks, then the banks gave much of that money right back to the Fed and got paid to do so.

Hence, much of the newly created FED money never made it into the hands of the consumer and subsequently into circulation. It came right back to the coffers of the FED. Since this money did not circulate, there was little to no monetary inflation.

This time around, the CoVid-19 bailouts have about half of the money going to consumers and businesses. Although trillions will continue to flow to the financial sectors (causing inflation in stock prices), much of this new money will go into public circulation.

That said, it is in this analysts opinion, inflation is on its way.

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The game that is GAMESTOP Update Jan 30 2021

The game that is GameStop

GameStop is a publicly traded company (under the symbol GME) whose business model failed to evolve with the market place. GME sold video games at its stores in DVD form while the world’s gamers were moving to downloads. Failing to change its method of business, it was a failing company many say was headed for the garbage heap.

Despite its continuing spiral into oblivion, a well-known investor took a heavy position in GameStop in the hopes of having some influence in turning it around by applying pressure to GME management as a major stockholder.

When the news broke that this major investor bought stock, the price soared as hopeful buyers started accumulating it. Wall Street hinted that these buyers were the unsophisticated day trader type that knew nothing about company fundamentals, and instead were blindly buying the hype and hope of this new institutional investor.

In no time, professional traders took notice of the influx of stock buyers and believed the company still had no hope of survival. These firms started taking “short” positions in GME, thereby betting against the little guy that had bought the stock on the hype only. “Shorting” means one bets on a stock falling in value. To short a stock, one method is to sell shares of the company you don’t actually have. The caveat is at some point you have to buy them back to close out the trade, and hopefully at a lower price, pocketing the difference.

The most one could hope for is for shares to go to zero. “Shorters” start to lose money if the stock rises, and if it rises a lot, major damage to a balance sheet could occur, or in a worse case scenario, cause a possible bankruptcy.

Enter modern day social media. It is rumored some seed of an idea hatched on a popular stock trading platform into a call to muster the troops and get a lot of these stock bloggers to start buying shares in GME. The goal was to have the little guy “stick it” to the Wall Street firms that were shorting the stock by jamming GME stock higher, causing these firms heavy losses.

No one really knows where the idea was hatched or who started it, but the idea of the little guy handing it to large Wall Street firms resonated with many. Possibly tired of being called “stupid day traders” or whatever they were labeled, an army of people started buying GME stock, all continually egged on in this popular social media platform.

Making a long story short, up went GME stock and it kept going up. The stock passed the 30,s and 40’s and went as high as into the 480’s.. GME soon made the evening news and accelerated the hype and therefore the buying. The losses to some Wall Street firms were massive.

Now all over the news media, the little guy saw their day in the sun. And because these day traders only communicated with each other on a media platform and were not a concerted group (which may have been grounds for prosecution for stock manipulation) the news coverage just made the event all that more ridiculous and in a sense, handcuffed authorities on how to deal with it.

After all, there was no specific person coordinating a group of investors. It was just a lot of people all with same idea, likely seeing it as a “stick it to Wall Street” moment with the hope of quick profits to boot, all communicating through social media.

Once a stock is shorted, if it climbs, those shorting it see their losses mount, and eventually must buy the shares themselves to stem the losses, causing what is called a “short squeeze”. This squeeze is self-perpetuating, making the stock go even higher, causing even more losses.

As weird went to absurd, elected officials, the SEC and even the White house, all chimed in on one side of the argument or the other. Some are rooting for the little guy’s right to trade as they see fit, while others say the whole circus must be reined in before huge losses are realized by novice traders who don’t fully comprehend the risk they are undertaking.

In conclusion, these types of manias have occurred before, albeit the mechanism of why it is happening is different from those in the past whereas the buying this time is supercharged by a social media platform. The frenzy is not limited to GameStop, as the event is occurring in other less popular stocks as well, with more being rumored to be targeted.

Regulators have already begun to step in. Media is lit up with debate and like most similar events, this will probably end badly for many. In my opinion, GME may revert back to a stock destined for the garbage heap. No doubt, this will be one for the record books and talked about for years. Bottom line is that this is as far from “investing” as one could get, and even pushes the boundaries of the most outrageous of gambling, if you even could all it that. And if you’re wondering, in this particular wild event, it is estimated over 20 billion was squeezed out of the GameStop fiasco.

Score one for the little guy.

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THIS ARTICLE WAS PUBLISHED JANUARY 12, BEFORE ALL THIS MARKET ROUT HAPPENED AND WAS ALSO SENT TO CLIENT

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"BUY THE RUMOR. SELL THE NEWS. IS A MARKET CORRECTION COMING?'

JANUARY 12, 2021

There is an old saying in the investing world: “buy the rumor, sell the news”.

This, like all other quips in the world of stocks, is by no means a precursor to what will happen, only what might happen. This saying refers to the possibility that a stock will rise in price as a rumor hits the mill, only to fall when the rumor becomes fact.

For example. Imagine a smart phone manufacture who is rumored to have a blowout quarter in an upcoming earning season. The stock might increase as the rumor makes its way around Wall Street and public media. Then when the company posts earnings, it is indeed a blowout quarter. Surprising many an investor however, the stock sells off on the news.

This would be a classic example of “buy the rumor, sell the news”. It doesn’t always happen where good news is sold off, but it has happened more often than one would think.

We can take this occurrence and extrapolate it to the general market. The question now becomes can the current market rally, which has brought it above 30,000 on the Dow for the first time ever, continue to set even higher highs?

It is no surprise the markets new high flies in the face of current economic conditions. Indeed, the economy, because of the CoVid shutdowns, has seldom been in worse shape. Meanwhile, since the third week of March, the markets have recorded historic gains, to rise from Dow low of 18,213 to over 30,000.

The markets obviously were not looking at what was.

What was, was an economy shuttered by CoVid.

Instead, it could be argued, the markets meteoric rise was because investors were likely looking at what will be.

What the market was looking forward to was a vaccine, humongous Fed spending, and an eventual reopening of the world’s economies. From week to week and from month to month, since the current environment was so bad, the hopes of a world reopening and what that would bring, was enough to push the markets ever higher. Its almost as if times were so bleak, the imagination of investors kept the registers ringing on Wall Street, and therefore, kept the stock market rising.

Fast forward to today, and we could be looking at an extremely overstretched market, which some argue is historically overbought on many levels. At this time, it might be time to ask, what more good news could come out?

The vaccine it here and the Fed has spent trillions. Reopening is happening and the vaccine is making its way around the globe. It is only a matter of time before the world resumes at least some sense of normalcy.

That said, as of now, I can only see one more piece of good news in our future and the rumor of that is already out. One more round of stimulus from the Biden administration is in the works, and we already know it is.

What this means, at least to this analyst, is that the good news, possibly all of it, is already baked into the proverbial cake. The market could be said to be as high as the good news warrants, and has nothing to look forward to.

In my opinion, with a market that has risen close 60% off its lows in a mere 9 months, it is time for caution. If portfolios reflect market gains, then profits could be substantial, and protecting such profits should now be the order of the day.

After all, it’s better to miss a market top, then ride a market back down in a severe correction.

A perfect “buy the rumor, sell the news” event may be setting up with the announcement of the final stimulus program from Washington.

That said, another saying comes to mind right now, and that saying goes something like this: “Nobody ever went broke taking a profit”.

Ignore at your own peril.

This article expresses the opinion of Marc Cuniberti only and does not reflect the opinion of any news media or financial firm and is not meant as investment advice. Investing involves risk and you can lose money. No one can predict market movements at any time. Consult a financial professional before making any investment decisions. A full list of service from Mr. Cuniberti can be viewed at www.moneymanagementradio.com. California Insurance Lic# 0L34249. Medicare agent and market analyst, Mr. Cuniberti graduated in 1979 with honors with a B.A. in Economics from SDSU. He can be reached at (530) 559-1214

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