It’s NOT Different This Time

Episode 21.001CNBC still thinks it is “different this time.”  In a post by Diana Olick entitled Frothy, yes, but don’t call it a housing bubble, she writes “This is not, however, a “housing bubble,” because by definition, an economic bubble eventually bursts, and home prices are very unlikely to fall.”  Olick continues, “…even if the Federal Reserve hikes its lending rate, mortgage rates are unlikely to jump dramatically.”  Well neither part is true, so please erase the last two sentences from your memory.

You see, homeownership is at it’s lowest level since 1967 because average Americans can only afford to rent something small.  They would probably love to have a single family home with a yard for the kids, but exorbitant home prices keep these families in apartments instead.  Interest rates need to go up so they can place downward pressure on home prices.  This will cause the monthly payment on a 30 year mortgage to eventually become more affordable for the nation’s renters.

Another thing to note is that a fair portion of purchasers are only in the market as an investment opportunity.  Olick admits this writing, “About one-third of buyers today are not using any financing, which suggests still strong investor demand.”  Many investors are jumping into the housing market because they’re temporarily able to cash flow these overpriced properties.  The profits landlords are making seem attractive in the short run since the stock market is already rolling over and saving has become obsolete.  These investors will be disappointed in the long-run though because tenants will eventually be able to afford their own place for an even lower monthly payment.

Once these landlords realize that their property is empty, then they’ll try to unload their property at fire sale prices.  The whole scene will turn into a vicious cycle, ultimately resulting in the pendulum swinging to the highest homeownership rate in U.S. history.  When measured in terms of precious metals, these homes will represent a tremendous value for the gold and silver bugs.

It may sound like the bursting of the second housing bubble will lead to economic prosperity, but that certainly won’t be the case.  Increased rates are going to stifle the economy in ways not seen since the Great Depression.  What’s worse is that these increases probably won’t keep up with the real cost of living, so prices will continue to rise on everyday items while jobs dry up.  This stagnation of rising prices in a worsening economy will be too painful for the Fed to ignore.  Most likey, the Fed will announce successive rounds of quantitative easing that will make the first three look modest.  Before anyone even realizes, the Fed could take the country into a hyper-inflationary depression (which I think is very likely) and unleash the Greater Depression ahead.

“Fool Me Once…

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There’s an old expression that George W. Bush once butchered.  “Fool me once, shame on you.  Fool me twice, shame on me.”  This adage certainly applies to the biggest financial collapse in recent memory, the housing bubble.  Most adults over the age of thirty vividly remember the consequences of the bubble and subsequent credit crisis.  The fear of market contagion and the collapse of Lehman Brothers led then Treasury Secretary Hank Paulson to orchestrate a bail out of the country’s largest banks.  Paulson created TARP, the Troubled Asset Relief Program, and the U.S. tax payer suddenly became responsible for the poor decisions of Wall Street businessmen.  Although Americans have spent an exceptional amount of time focused on these crooks since the crisis, the real cause of the housing bubble seems to have been forgotten or purposely overlooked.  Lucky for you, I still remember.

Back in late 90’s, the Clinton Administration wanted more people to be able to afford a home.  The Federal Reserve, run by “The Maestro” Alan Greenspan, accommodated the goal by decreasing interest rates.  Lax lending standards became the norm, and Fannie Mae and Freddie Mac guaranteed all mortgage loans.  This provided defunct firms like Countrywide with the moral hazard it needed to make a mortgage to anyone who could fog a mirror.  The practice picked up even more speed during the Bush years, and finally ended in collapse during the financial crisis of 2008.

During the mania, there were many indicators that there was a bubble brewing in the marketplace.  A story of Las Vegas hairdresser purchasing multiple homes with interest only mortgages stands out as a glittering jewel of foolishness. Television shows like Flip This House persuaded Americans that anyone could become a real estate mogul in the new housing economy.  Anecdotally, one of the worst students from my high school told me in 2005 that he found a job working for a mortgage broker.  After the bubble burst, I swore that I would never be duped by such irrational exuberance again, and I would make sure to look for these contra-indicators in the future.

Well, they’re back!  The house flipping shows are back in full force on HGTV with programs like Property Virgins and Flip or FlopInterest only loans are back and other subprime loans have returned while banks try to scrape the bottom of the applicant barrel.  Although I don’t personally know any fools working in the mortgage industry this time around, I still hear people saying that a house is a good investment.  To that, I’ll borrow the words of W and say, “You’re not gonna fool me again.”

Pay No Attention to the Fed Chairman Behind the Curtain

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Tomorrow at 2pm, the Fed could announce that interest rates will be raised for the first time in almost seven years.  Steve Liesman, a CNBC correspondent known for praising for the Fed, published an article this morning stating, “For the first time in the five-year history of the CNBC Fed Survey, a plurality of respondents forecast that the central bank will raise rates at the current meeting.”

I’ll put my name on it.  The Fed will not raise interest rates tomorrow or ever without pricking the world’s largest financial bubble.  So what do I know that Steve Liesman and 49% of economists do not?  First, I know that our government officials always make the wrong decision.  Raising rates would be the right thing to do because it would finally add discipline to a market that is an economic basket case.  Since modern American leaders always take the easy road, we can be sure that Janet Yellin will hold rates at zero.

Secondly, the Fed knows that raising rates tomorrow would send the market into a tailspin, which would immediately require a reversal of the meager increase at the next meeting.  This would only serve to reduce the Fed’s already minuscule credibility, especially when it would be forced to immediately announce QE4.  Even according to a CNBC poll, most respondents think that a rate hike will come after tomorrow.  The greatest error about this poll is not the 37% who think that rates will rise tomorrow, but the survey did not include “QE4 will come first” as an answer option.

So there it is.  I put my name on it.  Herm Edwards would be proud.

The Free State Project

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As the presidential race heats up, the focus of the country will eventually be on the Iowa caucus and New Hampshire primary.  The latter state happens to be home to a growing movement known as the Free State Project (FSP).  This little known but well organized movement is gaining traction as it closes in its goal of getting 20,000 liberty minded individuals to move to the “Live Free or Die” state.

The movement is attracting people from all walks of life, but they all are working “toward the creation of a society in which the maximum role of government is the protection of life, liberty, and property.”  Naturally, most of the people in this movement believe in the second amendment, sound money and a society based on rugged individualism and self-reliance.  These values are put on full display each year at the annual liberty camping event called the Porcupine Freedom Festival (or PorcFest for short),

So why is this happening in New Hampshire or all places?  According to the FSP website, the state is hospitable to libertarians for several unique reasons.  First, it is consistently among the most livable states.  Secondly, it boasts plenty of recreational resources for outdoor activities. Third is the the fact the New Hampshire possesses the largest state legislature in the US, allowing the highest ratio of representation and easy access to politics.  Finally, and most importantly, the state offers an existing culture of liberty that enables citizens to fight for freedom.  Examples include a low regulation mindset and no state sales or income tax.

There’s no doubt that the FSP still has its work cut for it in the years ahead, but no one should underestimate the power that a growing minority could have on this state.  Pay special attention to the outcome of the New Hampshire primary, because it could be a harbinger of the future success of the FSP.

The Modern Debtors Prison

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While the conventional wisdom still suggests the U.S. is the best place to be, a look at Treasury Department figures would suggest otherwise.  According to CNBC the Treasury Department reported that 1,335 Americans became expatriates in the first quarter of 2015.  This surpassed the previous record of 1,130 that was published in the second quarter in 2013. So what is prompting Americans to give up the most desired passport in the world?

A look beneath the surface indicates that a U.S. passport is not as desirable as it used to be.  Thanks to big government welfare programs and military crusades, wealthy Americans are being juiced for every last dollar, and they’re doing something about it.  In order to protect their wealth from endless confiscation, our best and brightest are doing the unthinkable and giving up their U.S. citizenship.

Some of these Americans happen to be celebrities, businessmen and sports heroes.  Facebook co-founder Eduardo Saverin pulled the plug on his citizenship in 2012 for “tax reasons.”  Tina Turner “relinquished” her passport in 2013, and most commentators speculate that America’s aggressive tax policies pushed her to do so.  Russia recently granted a passport to Roy Jones, Jr., so it wouldn’t be a surprise if he is the next celebrity to cut ties with Uncle Sam.

America’s freedom index is falling while its tax policy becomes even more onerous. This will cause the pace of renunciations to pick up, so Congress will be inclined to enact Exit Tax legislation.  The citizen renunciation form already increased by over 422% in January, and the price will leap as our freedoms wane.  The U.S. is slowly becoming a debtor’s prison, and it is bound to get worse.

The Moral Hazard of Student Loans

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While the national debt continues to balloon, the student loan bubble is also reaching epic proportions.  Back in 2013, the amount of student debt held by Americans was approximately $1.2 trillion, and it has grown to $1.4 trillion today.  According to the Huffington Post, The figure stood at $730.7 billion (in 2009), and that amount is expected to double by early next year, despite the Obama administration’s successful efforts to increase the amount of grants available to students from low-income households.”

What the Huffington Post fails to understand is college tuition is far outpacing the meaningless grants provided.  The indebtedness has gotten so bad for college graduates that 30% would sell an organ to erase their student debt, and that’s just the beginning.  Duke University student Belle Knox gained national attention when she was outed as an adult movie star by a classmate.  When asked why she decided to get into pornography, Belle explained it was due to the high cost of her Duke tuition.

Some experts think that the student loan debt could increase to a whopping $3.3 trillion by 2024, but they are assuming that bubbles grow forever.  We learned from the housing bubble that prices do not go up forever, and student loans won’t be any different.  To be sure that the student loan bubble may be on its final legs, look no further than the growing movement to even forgive student debt.

If loan forgiveness is successful, the moral hazard created would cause universities to charge as much as they want because, why not, it’s the American taxpayer who is on the hook.  The only upside to this plan is that maybe Americans will finally wake up to the scam, and the student loan bubble will implode.  Let’s hope this happens soon before you and I have even more stolen from our paychecks.

SSDI: The Next Ponzi to Collapse

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Like most government programs that promise something for nothing, the Social Security Disability Insurance (SSDI) Program has over-promised and will begin under-delivering in 2016.  According to a Phil Moeller, “More than 11 million disabled workers and their family members received SSDI payments last year. The average monthly benefit is about $1,150. In families where other family members also qualified for benefits, the average family benefit at the end of 2013 was $1,973 a month.”

Moeller goes on to suggest that most of the SSDI recipients need the welfare they receive, but further inspection suggests otherwise.  Forbes staff writer Avik Roy first reported the problem back in 2013. “As the below chart shows, the last three times the unemployment rate has gone up due to recession—in the early 1990s, the early 2000s, and the late 2000s—applications for Social Security Disability Insurance have spiked.”  Nothing if more prone to fraud, waste and abuse than a government program.

No one is better at ignoring moral hazard than Uncle Sam.  He seems to think that only honest people will ask for assistance because they really need it.  How naive.  But as our political leaders place more impediments to the free market in place, more Americans feel entitled to sign up for SSDI.  It shouldn’t surprise anyone that SSDI is going broke far faster than actuaries ever predicted.  I’m sure they won’t anticipate the collapse of SSDI’s even bigger Ponzi brother, Social Security, but what else is new?

Puerto Rico & Retirement

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Since the Puerto Rican Governor announced last month that his island cannot pay back the $72B they owe, it has become apparent that he wasn’t bluffing.  Today, the Financial Times reported, “Puerto Rico faces a $28bn financing gap over the next five years, top officials and outside advisers to the government warned on Wednesday.”  Puerto Rico is a glittering jewel of what you find when you reach the end of failed socialist policies.  Liberal politicians made promises that bought alot of votes, but when it came time to pay for those promises, Puerto Ricans discovered they were empty.

Retired government employees and teachers are discovering that they never should have trusted their retirement to a system run by bureaucrats.  Now they are left to wonder if they will be able to survive their golden years with dignity or beg for the highly competitive position of Wal-Mart greeter.  Americans should take heed from lessons being given in this tiny U.S. territory because they will be taught here one day soon.

According to a recent CNBC survey, “Baby boomers and seniors said that their biggest financial challenge was planning for retirement, while younger people were most concerned with paying for college and sticking to a budget.”  The same survey also indicated that the biggest fear for baby boomers, those aged 55-64, is “Never being able to retire.”  If Puerto Rico is a harbinger of things to come, then these baby boomer fears are not misplaced.

The Kennedy Financial Blog

This is the first official post of the official Kennedy Financial (KF) blog, and I know what you’re thinking.  “Just what I need.  Another stupid blog!”  I can assure you that this one will be different.  The goal of the KF blog will teach you about recent developments in the market and how you can adjust your personal finances accordingly.  The United States is in dire fiscal straits, but no one seems to care.  Cecile the Lion and the MTV VMAs seem to get more attention in a country that is heading toward certain bankruptcy.

The “Greater Depression” coming to America is going to be a major set back for many citizens who never saw it coming.  Others, who planned accordingly, will see both an increase in their total wealth, as well as a significant rise in their standard of living.  The good news for you is that you are reading this blog, and you will be armed with the knowledge you need to get through the tough times right around the corner (in relative terms).

Be sure to bookmark this page, and check back on most weekdays for updated content.  You can also check the Kennedy Financial website, the KF podcast, or our YouTube channel as a daily source for market and economic information.  Please feel free to add your questions in the comments section, and we will get back to you with an honest answer.  Thank you for bookmarking this page and spreading this message to likeminded friends and family.