Palisade Research - Wed, Jan 31, 2018

Think The Economy is Okay? Wait Until You See These 3 Charts

falling stock market chart

There is something going on in the economy that no one is talking about.

And it is making me uneasy. . .

For the last decade, the world's economies have piled on an insane amount of debt.

It's not hard to see why this happened.

Years of near zero interest rates - even negative across Europe and Japan - allowed governments and households to borrow money for almost nothing.

But that's changing. . .

For instance - after years of low rates, the US Treasury now has over $21 trillion in debt (and this is not including unfunded liabilities).

This isn't something new - but this is where things get scary.

Since the Federal Reserve began raising interest rates in Q4 2015, interest payments on the United States national debt has soared 38%.

line chart of government interest payments in billions vs. Fed Funds Rates from 1990 to present

Let that soak in. . .

A 1.25% rise in short-term interest rates has corresponded with a 38% increase in the amount of interest paid for the United States national debt.

This isn't even accounting for the deficits coming from President Trump's massive tax cut plan. . .

How did we get here?

It went something like this. . .

The Federal Reserve wanted to boost growth and consumption in the economy. So, they lowered interest rates to get things going.

This allowed Joe and Karen to go out and refinance their house, finance a new car, buy things on their credit cards - and everything else they can do to live above their means.

Thanks to low interest rates, they only have to make small payments to keep their lavish lifestyle.

Looks like a win-win, right?

The Government gets their growth and big spending policies, and Joe and Karen get to live nicer.

That is, until interest rates rise.

All of a sudden - after years of Joe and Karen piling debt onto their plates - they now have interest payments doubling across the board.

Their mortgage, cars loans, credit cards, student debts - all of it.

Take a look at the credit card delinquency rates and how they've soared right after rates started rising. . .

The last time they were this high was during the 2008 Great Recession.

line chart showing the percentages of delinquencies rising for credit cards from 1991

People get hooked on debt when rates are low. But when rates rise - it becomes too much to manage.

Here is another chart that is indicating more trouble ahead. . .

The Commercial and Industrial Loans (C&I Loans) have stalled out.

line chart shows how much commercial and industrial loans have risen in billions of dollars from 1990

The last three times this happened a recession followed.

It makes sense because as interest rates are rising, the huge debts outstanding can't manage to be refinanced at a higher rate.

So new loans are stalling.

This isn't some "there is too much debt - the world is going to blow up - so go buy gold" piece. . .

I'm writing this to let you know that there are problems brewing underneath that no one is talking about - yet.

Sooner than later, rates will have to go back down. And the US Dollar will weaken. This will translate into higher prices for commodities, especially gold and silver.

Doubt it?

Remember rates were rising up until 2008 - then suddenly they were cut all the way to zero.

That's when gold soared - especially gold mining stocks.

Make sure you're positioned for when the inevitable happens again. . .

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