Consider Stress-Testing Your Finances

[MAGS1]

In my initial post, I highlighted several tells I believe are pointing towards our next economic decline. If I could summarize those matters in one word, it would be, "complacent." I believe we've become complacent towards several big picture, financial tipping points which will negatively impact the economy going forward.

One concern is the amount of debt the US has been accumulating, both within the GOV and the population as a whole. I'll go into a bit more detail on the topic in this post, focusing on GOV debt.

This recent article highlights the current rate at which the US GOV is indebting itself: $1T every 100 days. $10B a day. Roughly $.5B every hour or $7M a minute.

https://www.cnbc.com/2024/03/01/the...ising-by-1-trillion-about-every-100-days.html

The following links contain some easily-digestible charts which help quantify the amount of spending and where it goes.

https://www.cbo.gov/publication/58888

https://www.gao.gov/americas-fiscal-future

https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/

For a historical perspective, the last time we balanced the US federal budget was 2001. Before that: 1969. Times past, governments would deficit spend during unique and trying times: wars, natural disasters, recessions, etc.

Deficit spending during economic downturns is generally accepted as a net positive. Unfortunately, the US and other countries have accepted continuous deficit spending as the norm.

Friendly reminder: no politics please. With the exception of the period of 1998-2001, the US has been overspending for the last 55 years. We've been artificially stimulating the economy for decades. There's plenty of blame to go around.

With the previous links helping to quantify the scale of the problem, I thought I'd spend the remainder of this post detailing how the federal debt pile impacts the economy and our investments.

When the federal government needs money to pay bills, it creates financial debentures of differing maturities: Treasury Bills (one month to one year), Notes (two to 10 years) and Bonds (20-30 years) . The time to maturity and notional interest paid are two attributes by the GOV before offering them to bidders.

Buyers review what's for sale and associated risks to determine what they think is a fair price. If a buyer underpays at auction, the effective yield is greater to the investor, the money received less to the government. If the buyer overpays, the yield is less with the government receiving more.

As the government sells more and more debt, the risk of not paying it back increases. Buyers demand a better yield and bid even lower. The government receives less and less while effectively paying more for the same loan/s.

Over time, the "debt bomb" reaches a point of critical mass, creating a runaway effect where more-and-more revenue generation is focused on servicing debt. It's akin to taking out a loan with a loan shark. You can't make your payment this week, so that payment goes to the principle, which then increases future payments, making any of it even more difficult to pay back.

To sell more debt, the government has to offer ever more attractive yields. Doing so has a knock-on effect, forcing other entities offering their debt to increase their yields to remain competitive.

Throughout the economy, individuals, businesses and the government pay more in interest on their loans. Money which could have been spent buying a new car, opening a new product line or offering healthcare is re-directed towards interest payments. Less economic output. Fewer jobs. Less returns on investments.

Many feel we're already there or approaching this outcome now. It's my belief that we should not expect as great of economic output in the US as we have had before. The condition is one of an financial impairment with no foreseeable relief.

Times past, many would table ideas on how to fix the problem. No one openly discusses the issue now; repairing it would require significant changes to our standard of living. As an exercise, attempt to find $1T in savings towards balancing the federal budget. You can't do it without significantly affecting the population and economy. And the $1T doesn't begin paying the debt down either; it simply balances the budget and slows down the rate of debt growth.

Other governments have adopted austerity programs, as a way to reign in spending. I'd encourage anyone to google that term and read what they have done, as a precursor to what I think will happen in the US.

To make matters more urgent, many of the social services (Medicare, Medicaid and Social Security) are soon to begin paying out more than they receive. The effect will be reduced disbursements throughout the health care system (currently 20% of US GDP) and Social Security (projected cuts in monthly checks: 25-30%). Millions of people and a significant sector of the economy will be immediately impacted, while the GOV is already over-extended.

And there's the additional concern of any upcoming economic slowdowns, prime time for even greater amounts of economic stimulus, which unfortunately is a no-win situation. We've done nothing before, at the start of the Great Depression. But if we do something, even temporarily, it will add to the existing problem.

It took us a long time to get here. It's going to take a long time to turn things around. No quick fixes. No easy outs. Pundits purporting how simple it is to correct these issues are not telling the truth. If it was so easy, someone would have already fixed it and taken credit.

Consider and plan accordingly.

Well said. We (and other countries) have a spending problem. And as you say, there’s plenty of blame to go around. To blame any single person or even party is laughable, they all are guilty. I keep seeing people pushing for tax cuts, taxes are too high, etc. I don’t disagree with that sentiment at all, HOWEVER, any cuts to taxes must be met with GREATER cuts to spending to have a positive effect. Otherwise you are adding to the debt (not making any spending cuts) or just treading water (spending cut = tax cuts). We saw that in the prior administration. Tax cuts were passed but there were no meaningful spending cuts to go with it, those cuts have been adding to the deficit. Just further proof you need both sides of the equation in order for it to work as intended.

As you say, it took a long time to get here and there is no easy fix. Touching spending programs are political death sentences, yet they need to be addressed. And I’m not talking just SS and Medicare (even though they are among the largest). Trying not to get too political here but maybe if Congress had term limits, they wouldn’t be so afraid about reelection and just tackle the issues. They know it’s a problem, they just don’t want to touch them for fear of not getting reelected. We need leaders that aren’t afraid to tell the people exactly how it is. We’re a mess, things need to change or else it will be a lot worse thank taking some of these programs away (or reducing/restructuring them).

There have to be hundreds of government spending programs that are either redundant or just not necessary, I unfortunately don’t have the time to research all of them. Reducing or eliminating a lot of those would go a long way though.

As to personal/household debt, yes consumers have a spending problem too. However, as state/local municipalities keep increasing various taxes to pay for local government programs, new buildings, roads, schools, etc., that financial burden falls on the taxpayers (and that’s not even including the federal level). Wages are not keeping up with inflation let alone any tax increases, be it sales tax, property tax, etc. So, at least to a certain degree, some of it is beyond a person’s control. Now, they could spend less on non-essential items but even the basic essentials are becoming unaffordable for those in lower and middle earning jobs or those on fixed incomes.

I think most of us know the problems, government officials included, but it’s difficult to take services away from those that have become dependent on them. Heck, even those that don’t use them don’t want some of them to go away, for fear that they might need them down the road. The government should provide certain services IMO, but it’s gotten so large in scope that it’s extremely difficult to reverse. At least without some short term pain.

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[Skye]

In my initial post, I listed some points as to why I thought current trends pointed to the US economy turning down. Personally, I see several parallels between today and the late 1920s. IMO, the current environment should give one pause.

Two more tells:

- Several large companies are filing motions, challenging the constitutionality of the National Labor Relations Board (NLRB)

https://www.theguardian.com/us-news/2024/mar/10/starbucks-trader-joes-spacex-challenge-labor-board

https://thehill.com/business/4491063-corporate-giants-aim-to-hobble-national-labor-relations-board/

The NLRB often acts as a backstop between companies and employees. The NLRB does favor unions and their ability to organize.

https://www.npr.org/sections/money/...union-boom-the-numbers-tell-a-different-story

Companies (Space X, Starbucks, Amazon, et al.) are in the process of filing motions against the NLRB. I believe initial arguments will be made within the 4th Federal Circuit Court, and if appealed, the Supreme Court. There's no indication how quickly any of this would play out.

YouTube is a great source for unfiltered, uninterrupted live streams of all things: Congress, Supreme Court, World Court, etc. And if you cannot watch or listen to it live, you can pull it up any other time. Motions, and other filed documents are readily available on-line.

- Housing affordability continues to decline

https://www.theguardian.com/society/2024/mar/12/renters-poll-owning-home

Some recent statistics tell us what we already know: housing is expensive AF. Existing home sales in my area happen only when they have to. What newly-built homes might come on the market are more expensive than ever before, with few people buying. I'm also noticing more houses being rented out by multiple parties, with three-plus people paying towards rent on one house. The residential market has all but locked-up.

With respect to supply and pricing, I'm feel like I'm witnessing one extreme now. In the other, 2008 and several years after, real estate was radioactive; you couldn't give it away. We're witnessing something akin to that in China today and previously in Japan. Different contributing factors and different timelines, but it's an example of how any asset class sees cycles of varying intensities and durations.

As before, consider impacts to you, your families and plan as best possible.

 

[MAGS1]

Just remember real estate is very location specific. Real estate 101 is Location, Location, Location. Where I’m at, housing prices continue to rise, although at a slower pace than 2021-2022. Interest rates don’t seem to be slowing things down like many expected, houses in good neighborhoods are not on the market for more than a month. And those goes for $250k houses all the way up to about $650k. Above that, it slows but there’s also a lot smaller buyer pool for a $750k house than say a $400k house. That said, there is a definite lack of affordable housing. What we use to think of as “starter homes” are priced so high that first time buyers are priced out unless they’ve been able to save for a substantial down payment. Apartments are the same, it costs so much to build so developers/owners need higher rents to make their projects pencil. And that prices out a good segment of the market also.

The market is already starting to factor in several rate cuts this year, although they’ve dialed back from where they were to start the year. Personally, I think rates need to stay where they are for a while. Inflation is still not totally under control although it has improved. If 3% inflation is the new norm for now, so be it, it’s better than 10%+. The economy has not yet shown signs it needs help yet either, the rate cuts should be saved for when the economy starts showing it needs helps. Start cutting too soon and you heat everything back up, inflation included. Just my $0.02 and I’m not an economist by any stretch.

Good inflation breakdown by CNBC yesterday too: https://www.cnbc.com/amp/2024/02/13/heres-the-inflation-breakdown-for-january-2024-in-one-chart.html

 

[Strokerswild]

Fantastic thread. I hope it continues without becoming idiotically political.

I turn 55 tomorrow. As such, I've been through both the the dot.com bust and the 2008 debacle. The dot.com bust essentially killed my employer at the time (electronics manufacturer with too many eggs in the telecom basket), and the 2008 event forced me out of a friend's engineering consulting company due to lack of work. Fortunately, in both cases I was able to find work in under a month. I grew up with parents that had the "save" mentality, so neither time was a real hardship outside the stress. Still learning experiences, for sure.

Fast forward to today, and due to those two experiences and that "save" mentality I am debt free, own two properties outright, and hold the pink slips to a small fleet of vehicles (that realistically should be thinned out). I've got well over a year's expenses in cash tucked away. Based on my math, I might even get to retire early, although I think I'd be bored out of my skull.

It can be done. Yet, I always feel like I'm not frugal enough.

I see how we as a country overspend (government and individually), and it makes me cringe.

 

[MAGS1]

Fantastic thread. I hope it continues without becoming idiotically political.

I turn 55 tomorrow. As such, I've been through both the the dot.com bust and the 2008 debacle. The dot.com bust essentially killed my employer at the time (electronics manufacturer with too many eggs in the telecom basket), and the 2008 event forced me out of a friend's engineering consulting company due to lack of work. Fortunately, in both cases I was able to find work in under a month. I grew up with parents that had the "save" mentality, so neither time was a real hardship outside the stress. Still learning experiences, for sure.

Fast forward to today, and due to those two experiences and that "save" mentality I am debt free, own two properties outright, and hold the pink slips to a small fleet of vehicles (that realistically should be thinned out). I've got well over a year's expenses in cash tucked away. Based on my math, I might even get to retire early, although I think I'd be bored out of my skull.

It can be done. Yet, I always feel like I'm not frugal enough.

I see how we as a country overspend (government and individually), and it makes me cringe.

Agreed, hopefully politics stays out of it.

I really like your approach. Focus on what you can do individually to be prepared for some type of event. I don’t mind having some debt, as long as I’m paying less in interest than I can earn in the market (hint for others, NOT credit card debt, that’s a losing proposition every time). I got 3.9% Ford financing on my Mustang and put plenty down on it via trade in and a little extra cash. Payment is very manageable. Same with our house, we refinanced in 2021 when rates were stupid low. Same situation there, we have plenty of equity in our house and our payment is very manageable if something were to happen unexpectedly.

But I also understand those that would just rather be debt free, absolutely nothing wrong with that, especially as you get closer to retirement.

And if you need debt but want to get rid of it as quick as you can, pay extra towards principal every month, as much as your budget will allow. You’d be surprised at how quickly it starts adding up and how much sooner you can pay it off.

 

[Strokerswild]

Agreed, hopefully politics stays out of it.

I really like your approach. Focus on what you can do individually to be prepared for some type of event. I don’t mind having some debt, as long as I’m paying less in interest than I can earn in the market (hint for others, NOT credit card debt, that’s a losing proposition every time). I got 3.9% Ford financing on my Mustang and put plenty down on it via trade in and a little extra cash. Payment is very manageable. Same with our house, we refinanced in 2021 when rates were stupid low. Same situation there, we have plenty of equity in our house and our payment is very manageable if something were to happen unexpectedly.

But I also understand those that would just rather be debt free, absolutely nothing wrong with that, especially as you get closer to retirement.

And if you need debt but want to get rid of it as quick as you can, pay extra towards principal every month, as much as your budget will allow. You’d be surprised at how quickly it starts adding up and how much sooner you can pay it off.

Absolutely on the bold. It's something I've done with any loan that I've ever had.

If I take out a loan on a vehicle, I go with a 60 month term but shoot for 36 for a payoff goal and pay accordingly. If you get in a bind for whatever reason, you can always fall back on the actual payment amount.

 

[Balr14]

Just remember real estate is very location specific. Real estate 101 is Location, Location, Location.

That's for sure. My previous house tripled in value, but that was over a 35 year timeframe with lots of upgrades. Actual value wasn't much more than inflation and it was a decent sized ranch house on a large lot in an expensive area. My current house is probably worth about what I paid for it 10 years ago after you deduct the costs of the upgrades. My son is a realter and he hasn't experienced anything but minor changes in the market in many years.

 

[klink]

This is a great thread with many thoughtful and insightful posts. I retired two years ago at age 60 and thank God we were able to retire debt-free. With the way inflation is hitting in the last couple years I can’t even imagine going into retirement with house, payment, car payments, and other debt.

 

[Skye]

https://www.theguardian.com/busines...an-ends-negative-interest-rates-business-live

https://www.bbc.com/news/business-68594141

Japan previously experienced an economic boom like no other, peaking in the 80s. Their bubble popped or started popping in 1989. Thirty-five years later, the Japanese economy has been showing signs of life. While not booming, Japan is fighting to get off life support.

A lot went into what happened and still continues, but the case highlights at least two things

- The unpredictable nature of the future

- If a negative economic event does happen, its intensity and durational impacts to any economy, economic sector or asset class

Consider and plan as best possible.

 

[Balr14]

This is a great thread with many thoughtful and insightful posts. I retired two years ago at age 60 and thank God we were able to retire debt-free. With the way inflation is hitting in the last couple years I can’t even imagine going into retirement with house, payment, car payments, and other debt.

We upgraded everything before we retired, inside and out. So, the house and everything should be good for another 20 years. It definitely helps our peace of mind. Our biggest expense now is food and we don't eat what we did when we were younger. It must be awful feeding a family with teenagers these days.

 

[Skye]

The last several days have been a great example how quickly personal perception, economic forecasts and financial markets can change.

Less than two weeks ago, the US was bee-bopping along, anticipating an economic soft landing, rate cuts this year and all that. Now, we're seeing what appears to be a long-term inflation problem, possibly a recession, the war in Ukraine favoring Russia, the possibility of the war in the Middle East expanding, with a sharp increase in the purchasing of gold and other commodities.

One report does not a trend make. But we did see last week that inflation will not be going down as quickly as expected.

https://www.cnbc.com/2024/04/10/heres-the-inflation-breakdown-for-march-2024-in-one-chart.html

Previously, I commented as to how excess GOV spending and policies can fuel inflation. A few days ago, I came across a page by the Brookings Institute that breaks down the existing Infrastructure Investment and Jobs Act:

https://www.brookings.edu/articles/brookings-federal-infrastructure-hub/

The site helps quantify just what $1T gets you and how it flows through every state and every sector of the economy. The effect is massive, especially when considering the multiplier effect.

https://courses.lumenlearning.com/wm-macroeconomics/chapter/the-expenditure-multiplier-effect/

Edit: equally powerful, in the opposite direction, is what happens when the stimulus is taken away. It's often not good. See "austerity programs".

My comments are not to dump on the current administration or the cited legislation. We're doing the same with defense spending, Medicaid/Medicare, tax cuts and financial credits. Anything the GOV is spending above and beyond what it is taking in is stimulus. And the spending can often make sense, when attempting to prime an economy coming out of a compromised situation (see recession).

Even by taking our existing situation and making it static, it's difficult to see global inflationary pressures abating. Several developed economies have similar sovereign debt issues; they're competing with us to secure funding while deficit spending like us. The situations in Ukraine and the Middle East will continue for years, needing funding and resources, even if only for humanitarian relief. Afterwards, there will be resettlements and rebuilding. Other situations, like Sudan and Haiti, have been pushed way to the back.

So, that's a lot. Big, big picture-wise, we're (virtually everyone on the planet) going to need more resources than we normally do, all of which drives inflation.

Taking profits from stocks, economic uncertainty and inflation are just three reasons why people are piling into gold and commodities in the last few weeks. People don't know what's going to happen, but they're comfortable with hard assets, things they can put their hands on.

Last month, everyone was talking AI. Before that, Tesla and Apple. Now, commodities. One should review any savings, insurance and other financial products regularly. How often is up to the individual and their situation. Making rapid or large changes is generally not a good idea. Chasing trends isn't either.

Returning to the topic of inflation, the following is a final reference: the yield on the 10-year treasury.

https://fred.stlouisfed.org/series/DGS10

Set the timeframe to "Max" in the chart, so you go back decades. You'll see how interest rates move cyclically (short-term) and secularly (long-term). These cycles can take many years to play out. Some will remember the era when getting a low double-digit, 30-year mortgage was thrilling, a blessing, relative to what others were paying.

I'm no better than predicting the future than anyone else. Maybe we're going to see interest rates and inflation akin to the late 70s and early 80s. Maybe we're going to have a 2008-like event next month.

Take a long-term view, or, a view consistent with your financial goals. Holding different asset classes and being diversified will help ride out and storms along the way. I referenced a handful of books in one of my earliest posts; those could help.

 

[klink]

The last several days have been a great example how quickly personal perception, economic forecasts and financial markets can change.

Less than two weeks ago, the US was bee-bopping along, anticipating an economic soft landing, rate cuts this year and all that. Now, we're seeing what appears to be a long-term inflation problem, possibly a recession, the war in Ukraine favoring Russia, the possibility of the war in the Middle East expanding, with a sharp increase in the purchasing of gold and other commodities.

One report does not a trend make. But we did see last week that inflation will not be going down as quickly as expected.

https://www.cnbc.com/2024/04/10/heres-the-inflation-breakdown-for-march-2024-in-one-chart.html

Previously, I commented as to how excess GOV spending and policies can fuel inflation. A few days ago, I came across a page by the Brookings Institute that breaks down the existing Infrastructure Investment and Jobs Act:

https://www.brookings.edu/articles/brookings-federal-infrastructure-hub/

The site helps quantify just what $1T gets you and how it flows through every state and every sector of the economy. The effect is massive, especially when considering the multiplier effect.

https://courses.lumenlearning.com/wm-macroeconomics/chapter/the-expenditure-multiplier-effect/

Edit: equally powerful, in the opposite direction, is what happens when the stimulus is taken away. It's often not good. See "austerity programs".

My comments are not to dump on the current administration or the cited legislation. We're doing the same with defense spending, Medicaid/Medicare, tax cuts and financial credits. Anything the GOV is spending above and beyond what it is taking in is stimulus. And the spending can often make sense, when attempting to prime an economy coming out of a compromised situation (see recession).

Even by taking our existing situation and making it static, it's difficult to see global inflationary pressures abating. Several developed economies have similar sovereign debt issues; they're competing with us to secure funding while deficit spending like us. The situations in Ukraine and the Middle East will continue for years, needing funding and resources, even if only for humanitarian relief. Afterwards, there will be resettlements and rebuilding. Other situations, like Sudan and Haiti, have been pushed way to the back.

So, that's a lot. Big, big picture-wise, we're (virtually everyone on the planet) going to need more resources than we normally do, all of which drives inflation.

Taking profits from stocks, economic uncertainty and inflation are just three reasons why people are piling into gold and commodities in the last few weeks. People don't know what's going to happen, but they're comfortable with hard assets, things they can put their hands on.

Last month, everyone was talking AI. Before that, Tesla and Apple. Now, commodities. One should review any savings, insurance and other financial products regularly. How often is up to the individual and their situation. Making rapid or large changes is generally not a good idea. Chasing trends isn't either.

Returning to the topic of inflation, the following is a final reference: the yield on the 10-year treasury.

https://fred.stlouisfed.org/series/DGS10

Set the timeframe to "Max" in the chart, so you go back decades. You'll see how interest rates move cyclically (short-term) and secularly (long-term). These cycles can take many years to play out. Some will remember the era when getting a low double-digit, 30-year mortgage was thrilling, a blessing, relative to what others were paying.

I'm no better than predicting the future than anyone else. Maybe we're going to see interest rates and inflation akin to the late 70s and early 80s. Maybe we're going to have a 2008-like event next month.

Take a long-term view, or, a view consistent with your financial goals. Holding different asset classes and being diversified will help ride out and storms along the way. I referenced a handful of books in one of my earliest posts; those could help.

Fantastic post.

 

[Skye]

https://www.cnbc.com/2024/04/24/why...r-for-longer-may-not-be-such-a-bad-thing.html

Some statistics and history on inflation and interest rates: why they might stay higher, longer.

Edit:

https://www.cnbc.com/2024/04/25/gdp-q1-2024-increased-at-a-1point6percent-rate.html

One report does not a trend make, but the following day, we received tells things were not going according to plan: GDP slowed while inflation increased.

It helps drive home the need to review finances and your personal situation a few times a year. A month ago, several were foreseeing rate cuts later in 2024. Now, that is becoming increasingly doubtful.

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