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U.S. Debt, Overseas Investment In U.S. Equities & Gold

U.S. Debt, Overseas Investment In U.S. Equities & Gold
Category: Market Reports
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Posted: 10-19-2016 11:51:00 AM

Did you know that the global debt has reached $152 trillion dollars up from $112 trillion just 4 years ago?
And many economists around the globe are saying the global debt crisis has reached a dangerous phase.

Recently I’ve been writing about that fact that our country’s debt is approaching $20 trillion dollars and not one politician is stepping up to the plate to address the issue. Not to mention, no one on Capitol Hill has the guts to address the out of control entitlement programs that need an overhaul to keep it for future generations.

You ask, why is he talking about this again?

Here’s why.

Did you know that the global debt has reached $152 trillion dollars up from $112 trillion just 4 years ago?
And many economists around the globe are saying the global debt crisis has reached a dangerous phase.

Since many in the U.S. are enjoying a robust equity market thanks, in large part due to the tremendous inflow of overseas money into our markets, many are blinded on how serious this issue can become.

When all this overseas investment money dries up, what direction do you think the stock market will head? It seems that the hawkish tone taken from some Fed Presidents is getting more and more traction these days and I’m afraid even if the data is not compelling the Fed will raise rates in December just to take some of the pressure off. Sort of a “one and done” rate hike.

There is no easy fix because many of us continue to spend beyond our means. People have been amassing debt and the costs of entitlements cannot be sustained with our aging population. Here are some stats to chew on:

  • The average credit card debt per U.S. household is almost $ 16,000.
  • The average mortgage balance for U.S. household is $ 172,000.
  • The average auto loan per U.S. household is almost $ 28,000.
  • The average US student loan is almost $ 49,000.

With banks around the world struggling to keep their heads above water because of negative interest rates or rates at zero, does anyone really know how leveraged they are? Because of regulations our hope is that our banks are better capitalized than the rest of the world. But do we really know?

Can a global crisis be much worse that the crisis that hit our shores in 2008?

This year corporate debt has hit a new high of $8.28 trillion on and student loan debt stands at $1.35 trillion. The only debt that has decreased from 2008 is mortgage debt standing currently at $9.52 million down some from the highs in 2008 of $10.58 trillion.

The Federal Reserve and other world central banks thought that holding true to a zero rate policy would stimulate growth. That’s just not been the case.

Entitlement programs have reached about $130 trillion dollars. The possible ways out of this mess would be to modify the programs, raise taxes on both individuals and corporations and cut dramatically all government programs.

Anyone want to guess what the odds are of this happening? Does anyone else fear that this is almost a zero chance?

How long will it take before the U.S. faces another downgrade. Political gridlock is alive and well with no end in sight. If we remember on Aug. 2, 2011 the President signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. Standard and Poor’s was looking for a $4 trillion reduction and downgraded the U.S. to AA-Plus rating. At that time I believe our deficit was around $15 trillion. Instead of reducing the debt by $2 trillion over ten years, our debt increased over 5 trillion in five years. The chart below shows you this trend.

09/30/2015 18,150,617,666,484.33
09/30/2014 17,824,071,380,733.82
09/30/2013 16,738,183,526,697.32
09/30/2012 16,066,241,407,385.89
09/30/2011 14,790,340,328,557.15
09/30/2010 13,561,623,030,891.79
09/30/2009 11,909,829,003,511.75
09/30/2008 10,024,724,896,912.49
09/30/2007 9,007,653,372,262.48
09/30/2006 8,506,973,899,215.23

So who ever gets into the White House and however many seats change in Congress, it looks like our politicians will have their work cut out for them more than ever before.

So how does this impact the price of gold? As I previously reported, in my opinion, the reason for the nice move in the price of gold this year was totally driven by the investments in the ETF arena. “IF” the Fed raises rates in December and/or there is something crazy that comes out of this election, I expect to see a weaker gold price going forward in the future.

However, my MAIN concern is, in the event that we see a significant sell off in equities, I expect the ETF investor to sell his gold and silver holdings to cover margin calls putting more downward pressure on the price of gold.

Some would see this as a negative. I see it as a positive. For the investors with patience and cash on hand, I believe we will soon see gold and silver at very attractive levels and these metals will once again be the “go to” investment.

Stay tuned, more to come.

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About The Author

Walter Pehowich Author Name: Walter Pehowich
Walter Pehowich is the executive vice president of precious metals investment services for Dillon Gage with over 38 years of experience in precious metals investment services. His career began in 1977 at Bache (which evolved to Prudential-Bache Securities and then Jefferies Investment Bank). While at Jefferies, he served as senior vice president with oversight of investment grade precious metal products. Pehowich holds a National Futures Association (NFA) Series 3 license, authorizing him to advise and sell alternative investments in commodities and futures markets.

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