Satisfied with your portfolio performance in 2016? New Update. Read March 26, 2016

 

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Marc's Notes:

Hi Money Fans!

As I leave for LA to talk about doing a show down there (way cool eh?) and then visiting the Southwest to view the sites and possible places to maybe buy a second home to rest my loins while in the LA area, I wanted to encourage you to consider attending my seminar in Nevada City. This class/seminar/wine event will cover the items in the flyer such as portfolio performance and strategies. Make your reservation today........

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The Fed continues to push buttons and pull levers to try and control the economy in the direction it wants it to go.  7 years after the worst crash since the depression here we sit with the markets again in the doldrums and the central banks again looking at their control panels and wondering what to do next.

The tools they have used to date include low interest rates, quantitative easing which is asset purchases from financial institutions, and on occasion bailout funds and other money creation programs.

The common threads include dynamics: buy distressed assets from financial institutions and make it easier for business and individuals to borrow money. Although the Fed could buy distressed assets from the banks until the cows come home and continually help their balance sheets, making money easier to borrow for everyone has its limitations.

What the fed cannot do is force businesses and individuals to take on more debt, no matter how low rates go. Therein lies the problem we may be seeing today. We

could be reaching an inflection point where the debt loads in today societies are just too great and people just can’t take on anymore debt. It’s a problem when debt only grows. In 2008/2009 debt levels had reached critical levels on many fronts. Banks were knee deep in it and so where many Americans and indeed citizens around the world. Instead of allowing the world of debt to bankrupt itself and repudiate that debt, central banks just printed up money to cover the debt for the financial sectors. Individuals got no such relief except for programs revolving around mortgage reductions and various other fairly insignificant debt assistance programs. The lion share of individual debt has not been improved upon. Debt levels are still high and going higher and at some point no more debt can be afforded no matter how low rates may go.

This pushing on a string as it has been called means the Fed may be powerless to initiate any improvement in the economy no matter what it does. It can improve bank balance sheets but the lion share of the real economy is the consumer. Without them, the economy may go nowhere fast.

Central banks are toying with a new idea to get people spending, although spending alone if it encompasses just more debt could just exasperate the problems we now face.

Central banks however seem to be continuing to operate on the notion that any spending is good spending, debt fueled or not. Since interest rates are almost as low as then can go,negative interest rates are a way to drop them past zero into the negative as the name implies. 

This means instead of getting paid to put money in the bank, or getting nothing, the banks actually charge to keep money on deposit. I saving money costs you, you won’t save it but spend it. it’s an odd way of looking at the old tradition of encouraging savings; to just spend all the money you have. Not what many would call a prudent way of doing things but that’s the jest of negative rates.

To be clear, the initial implementation of negative rates will apply only to financial institutions and not to individuals. Banks and large money centers who currently park money at the fed will be penalized to do so. This is thought to encourage banks and money centers to lend out that money that otherwise would be parked. But the key word here is lend. That’s just more debt. And if an overabundance of debt is part of the problem, is making more of it the answer?

That remains to be seen but common sense might lead one to argue against the fed as to what negative rates might accomplish in the long run. Would they lead to a nation higher in debt? And what happens then? Do we just borrow and borrow to the end of time?
Is there not an end game?

There are many more questions than answers. The Fed can make all the money it wants, but short of just sending out free checks to everyone, will the people want to borrow even more if the banks offer more money to lend? 

With rates already near zero, we may already have our answer.

Only time will tell if the consumer is willing to take on more debt should more money be made available, but we may have already be at the point where  no matter how much money is available to borrow, people just won’t borrow any more it.

Mr. Cuniberti is holding an investment seminar entitled “Investment strategies for today’s markets” on April 7th in the evening.  Call (530) 823-2792 or email below to register.