Your Portfolio Watch Weekly Update – September 16, 2019

Weekly Market Update by Retirement Lifestyle Advocates

Trends from the week before last continued last week as stocks advanced and metals retreated.

The big news in the markets last week, however, was the big retreat in the US Treasury long bond.

If you’re a regular reader of “Portfolio Watch”, you know that two weeks ago, in the September 2, 2019 issue, we made this observation:

Notice that during the month of August, the yield on the 30-Year Treasury Bond fell from 2.44% at the beginning of the month to finish the month at 1.96%.  That’s a decline in yield of nearly one half of one percent, or a move of 19.67%.  That means bonds rallied approximately that percentage.

That big move led us to rebalance the bond holdings in some of our managed portfolios last week.

Rebalancing, if you’re not familiar with the term, just means that we sold highly appreciated bonds and purchased other assets like stocks and gold (and cash) that had not appreciated as rapidly.

We thought you might like to see the chart that led us to make this move, which in this instance happened to be the correct one with the big pullback in bonds last week.

Chart One is a weekly price chart of a mutual fund that has the investment objective of tracking the price of the US Treasury long bond.

The red and green bars on the chart track weekly price action.  The red bars illustrate weeks that the price of bonds declined (yields went up) and the green bars show weeks the price of bonds went up (yields fell).

As you’ll note from the chart, there are three lines plotted as well. The blue line seems to track the top end of the price range and the red line tracks the low end of the price range.  Those lines are plotted two standard deviations from the middle line which is a 20-week moving average of price.

When prices exceed and close two standard deviations from the average price, either higher or lower, the probability is very high that prices will revert to the average price.  That is precisely what occurred last week in bonds.

Recently, we reported that the wealthy were cutting back on spending and it seemed that the middle class was going into debt to fund some of its lifestyle.

An article in “The Wall Street Journal” this week confirms this trend.  (Source: https://www.wsj.com/articles/families-go-deep-in-debt-to-stay-in-the-middle-class-11564673734?mod=e2fb&fbclid=IwAR094GG5xSD2UFvfynEtOpd2et7Zh8L2zIgkhUs_7nIInez21d61-RTSIHg)

The article points out that medical care, college, houses and cars have all become more expensive, but incomes have remained relatively stationary.

Debt accumulation seems to be making up the difference.

Consumer debt, excluding mortgages, now stands at about $4 trillion.  That’s an all-time nominal high and an all-time real high after adjusting for inflation.

Mortgage debt dropped after the financial crisis, at least partially due to defaults, but is now rising again.

Student debt has been a statistic we have tracked here closely.  Total student debt is now more than $1.5 trillion.

Automobile debt has exploded over the past 10 years.  It’s up almost 40% over that time frame and is now $1.3 trillion.  According to the article in “The Wall Street Journal”, the average loan size for new cars is up 11% in the last decade even after adjusting for inflation.  Experian reports the average loan for a car is now $32,187.

Bottom line is, that’s a lot of debt.

It’s important to remember that in our banking and economic system debt is money.  One person’s debt is another person or institution’s asset.  Should debt go unpaid, money disappears from the financial system creating a deflationary event.

A deflationary event typically sees asset prices fall.  That’s usually bad news for stocks and real estate.

Increasing debt levels can be sustainable if incomes are increasing proportionately, but the data suggests, as we noted above, that incomes are flat.

The article states that median household income in the United States was $61,372 at the end of calendar year 2017.  That’s per the US Census Bureau.

Adjusting for inflation, that is just above the 1999 level.  Not adjusted for inflation, incomes are up approximately 135%.

Compare that non-inflation adjusted rate increase with the fact that average 4-year tuition rates at four-year, public colleges are up 549% on an inflation-adjusted basis according to the College Board. 

Personal health care expenditures increased by about 276% over the same time frame.

Average housing prices went up 188% over that time frame according to the S&P CoreLogic Case-Shiller National Home Price Index.

It’s simply become much more difficult to remain middle class.

Credit card debt is higher. 

U.S. families that have credit card debt owed an average of $8,390 in the first quarter of 2019.  That’s up 9% from 2015 after adjusting for inflation.

Moving ahead, this will have to be a drag on the economy leading to the deflationary event we described above.

When debt levels rise and incomes don’t, you have an unsustainable scenario.  That’s where we are presently.

And, while there may be more upside, unsustainable situations always change course.

Once again, the words of the economist, Herbert Stein ring true, “if something cannot go on forever, it will stop.”

This will as well.

This week’s RLA Radio program features guest expert, Mr. Harry Dent.

Harry is a best-selling author and economist and we get his forecast for the economy and markets moving ahead.

We also explain the seldom discussed but historically accurate Dow to Gold ratio as a forecasting tool.

It’s an information-packed program that you won’t want to miss.

The entire radio program is now posted at www.RetirementLifestyleAdvocates.com.

Meanwhile, as the political season is ramping up and promises are being thrown around like rice at a wedding, we are reminded of the words of Benjamin Franklin:

“When the people find that they can vote themselves money that will herald the end of the republic.”

-Benjamin Franklin

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