Where Are We Heading?
Nov 24, 2009
Posted by Jody Eisenman | Filed under Uncategorized
Once again, the stock market and the economy seem to be heading in opposite directions. While the Dow Jones briefly hit another new yearly high yesterday, the overall economy continues to be weak. Today, the WSJ stated that almost one out of every four home owners are “under water”, meaning that they owe more on their homes than their homes are actually worth. While this does not they will all default tomorrow, it certainly isn’t a very good sign for the housing industry.
In addition, our nations’ debt is soaring. In an article from yesterdays’ New York Times (http://www.nytimes.com/2009/11/23/business/23rates.html?_r=1&th=&emc=th&pagewanted=print), they are focusing on the following:
- The deficit is now over $12 trillion.
- The interest alone on this debt is currently $200 billion; By 2019, it is projected to be over $700 billion.
- As the “baby boomers” begin to retire, the benefits due from Social Security and Medicare are due to explode.
What makes this situation potentially dangerous is that interest rates are still incredibly low. Right now, three month treasuries effectively have no yield at all, and even 6 month maturities have the splendid yield of 0.12. What that means is, if you put one million dollars in six month treasuries, you would earn $600 in interest for the six months. Hardly seems worth it, does it? Should interest rates rise, the debt service would clearly increase as well. As short term treasury rates really can’t go lower from here, there is really no chance for the debt service number to shrink unless the government either cuts services or raises taxes. On the other hand, a jump in rates could dramatically change the amount the government must pay every year.
Meanwhile, the stock market continues to soar…..
