Alex Green: Why Washington is ignoring the next financial crisis

From Alexander Green, Editor, Insider Alert:

In this space over the last month, I’ve discussed how many so-called “negatives” facing investors today aren’t really problems at all…

Automation – which has eliminated thousands of manufacturing jobs – actually improves U.S. productivity, reduces costs and creates more jobs than it destroys.

The U.S. trade deficit – which recently hit its highest level in five years – is a net positive. It represents a capital surplus. Much of this foreign capital goes to finance mortgages and consumer loans, helping to raise our standard of living. And, unlike a fiscal deficit, a trade deficit isn’t a debt that must be repaid.

But that is not the case with our metastasizing federal debt. Consider…

  • It reduces national income and savings – and crowds out private borrowing.
  • It makes the government less prepared to deal with future economic downturns, natural disasters, war and other setbacks.
  • It makes it harder to invest in basic science and medical research.
  • It makes it less likely that we can meet future pension and healthcare obligations.
  • It increases the likelihood of a currency or financial crisis.
  • It is also, in the eyes of many defense analysts, the biggest national security threat facing the United States today.

We face a growing intergenerational storm. There simply aren’t enough American workers to meet the looming Social Security, Medicare and Medicaid payouts to baby boomers like me.

Our entitlement system needs to be radically reformed. Every serious politician knows it. Yet neither political party will do anything about it.

It may take a full-scale financial crisis to force Washington to act responsibly.

Given the magnitude of the problem, I’m often asked at investment conferences why the markets haven’t crashed already.

There are several reasons. The first is that while the federal debt is now equal to the size of the economy, the amount held by the public stands at just 77% of GDP. (The Federal Reserve holds most of the rest and is currently turning the interest payments over to the Treasury.)

Another reason is rock-bottom interest rates. They have allowed Washington to pump up the debt without paying the price. As the debt doubled over the last eight years, the rate of interest halved.

Yet another is that we can still service the debt… for now. For example, if you had $100,000 in credit card debt at 18% interest, you could muddle on as long as you could manage to pay $18,000 a year.

But the problem becomes unsustainable when the debt becomes so large that it can no longer be serviced. That’s the path we’re on today.

And, bear in mind, investors account for only what they can see six to nine months out. (Even then, the view is always hazy.) It is unlikely the problem will come to a head that soon.

So it’s natural that market participants shrug it off – for now.

But don’t be complacent. The money isn’t there to meet the promises that politicians have made. And the longer we wait – as with any debt problem – the harder it is to fix.

Erskine Bowles of the bipartisan Simpson-Bowles commission on the debt said, “I took this job for my grandchildren; six months later, it was for my children, and now it’s for me!”

In years past, I argued that our elected “misrepresentatives” in Washington would reform entitlements before the problem became a full-blown crisis. I’m far less certain now.

We are living in the most polarized political environment in my lifetime. Democrats complained that under Obama the Republicans became the “party of no,” opposing all of his major policy initiatives. (Republicans responded that that’s exactly why voters sent them there.)

Now Democrats are unified in their opposition to Trump’s policy proposals. (Grassroots liberals even call themselves “The Resistance.”)

The only thing Democrats and Republicans can agree on is – surprise – more spending. Republicans agree to the social spending they don’t want so that Democrats will agree to the defense spending they don’t want. (In Washington, this is called “bipartisan legislation.”)

Soon they will come together for trillions of dollars in infrastructure “investment,” so that both sides can brag to constituents about the accomplishment.

(Heck, in the recently passed $1 trillion omnibus spending bill, NASA received $19.65 billion, $600 million more than it even requested. After all, what’s $600 million when you’re spending other people’s money?)

Of course, we the people have let them get away with this. For years, Congress has had a single-digit approval rating and a 96% incumbent re-election rate.

Think voters have finally had enough? Think again.

In 2016, re-election rates were higher than average. Ninety-seven percent of House members and 93% of senators returned to their seats to do what they do best: spend taxpayer dollars.

People talk about the need for term limits or a balanced budget amendment. And I agree. Both would be a step in the right direction. But both require incumbents to limit their own powers and careers.

Not likely. At all.

That’s why it may take a full-blown financial crisis to rein in the spending. And that’s scary.

I know this is not what anyone wants to hear.

I’ve listened to apocalyptic economic forecasts for decades. And scoffed. Plunking all your money in gold bullion, freeze-dried food and shotgun shells has not been a winning investment strategy.

But your nest egg – whatever its size – is the end result of a lifetime of working, paying taxes and foregoing the pleasure of spending. (Deferred consumption is the very definition of saving.)

Wouldn’t it be a shame to see it come to naught, thanks to the yahoos in Washington?

That’s why I developed my “End of the World Portfolio.” And the name is only partly tongue-in-cheek.

In my next column, I’ll reveal how the portfolio is structured and why. We’ll also consider how much you should put in it – and the odds that you will have to rely on it.

Stay tuned…

Good investing,

Alex

Crux note: Alex recently revealed one of his biggest stock-picking secrets. It involves following a group of insider investors with a 100% success rate with their trades. Alex explains how you can easily piggyback off of these successful trades in your own trading account right here.

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