Dear Reader,
Good morning,
Happy Wednesday!
If you don’t know, today, January 15th, is National Hat Day.
So, of course, I ran out of the house this morning without my trusty hat!
Today I want to talk about something I hinted at in a video last week.
Last week I told you rising mortgage rates had claimed their first victim already.
Ally Financial announced it is closing its mortgage origination business.
They’re laying off hundreds of employees.
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The reason they’re leaving the mortgage business is because mortgage rates, as we’ve talked about here, have gone up a lot.
Basically, it’s put a chill on the market for mortgage originations.
For those of you who follow Ally Financial, that’s the old GMAC that was forced out after the 2009 financial crisis.
So, what we’re seeing here are the beginnings of the real impact of this fiscal spending – all this deficit spending.
We’ve been spending so much money since 2020 – under both presidents – that now we are starting to see the Fed lose control of interest rates.
We’re starting to see now a divergence between short-term rates where the Fed lowers them, and longer-term rates, which keep going higher because of the fiscal picture.
Because people expect a lot more spending as the Trump administration takes office.
And again, it’s not unique to Trump.
Biden did it.
Trump did it.
The last five years have been obscene.
The last two presidencies have just been obscene.
Blowout budget deficits.
It’s really unique in the history of our country…
Outside of wartime, to spend this kind of money.
We’re already starting to see the knock-on effects.
Mortgage activity is slowing down…
People are financing less…
Houses are still expensive.
So all the people who were waiting to buy a cheap home are out in the cold here.
We’re seeing the interest rate problem show up in other areas, too.
For example, Barron’s recently reported that Bank of America could see a $100 billion loss on its bond portfolio because of the rise in long-term interest rates.
The whole banking industry is looking at between half a trillion and three quarters of a trillion dollars in losses.
Just because of the rise in long-term interest rates in the 30-year bond and the 10-year bond.
Your pension funds are seeing the same thing.
We talk a lot about this in Midnight in America.
And somebody asked a good question on one of our videos last week…
“How could a country that is able to control and print its own currency, go bankrupt?”
It doesn’t happen like that.
What happens is, you start to see the drag on the economy that we’re starting to see right now.
It’s like we’re walking into wind, or the plane is facing drag. It’s being pushed down.
It’s really struggling to take off.
It’s making us a lot more sluggish.
It limits our capacity for growth.
And yes, we’re starting to see that happen.
When mortgage originations stop, when banks are forced to write down $100 billion losses, what we see is less economic activity.
Bank of America makes loans based upon its book value.
So with $100 billion less in book value, they can’t make as many loans.
In the case of Ally Financial, with mortgage rates this high, they’re not making these loans.
That’s not stimulative to the economy – that slows growth.
So this kind of fiscal spending and debt really starts to slow the growth of the country.
So to answer the question, “how can you go bankrupt if you can print your own money?”
The first stage is you see growth really slow down. (Like we’re seeing right now.)
Secondly, you see the government start to choke on the interest.
Yes, we can still print our own currency. We have that luxury.
But what you end up doing is robbing Peter to pay Paul.
You basically print money, inflating your way out of the problem. This robs current and future generations just to pay off past generations that have lent you money.
That debases your currency.
So, it may not look like a “bankruptcy,” like a regular company going bankrupt.
Instead, it looks like massive devaluation of currency over time.
Because how do you pay for these interest payments?
You just print more money. Every year.
The bigger the interest payments get, the more money you print to pay for them.
So it becomes a negative, self-enforcing cycle. Which is not good.
That’s where we are right now.
So, what do you do as an investor in a situation like this?
What I’ve been urging people to do is invest in really short-term government instruments.
Because long-term ones are getting killed.
Remember – there’s an inverse relationship between yields and bond prices.
So the higher yields go, the lower bond prices go.
We’ve seen hundreds of billions of dollars in losses already in the past four weeks, because of the rise in interest rates.
And what I’ve been urging people to do and what we talk about in our Midnight in America book is really focus on certain short-term money market funds which we talk about in that book.
Anyway, that’s what I wanted to talk about today.
I hope you have a wonderful National Hat Day.
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