The 2008 global recession was devastating in numerous ways as all of us know. One of the most damaging impacts from the recession has been the damage caused to our financial markets and their fundamental infrastructure. The recession triggered unprecedented involvement in the private sector by central banks like the Federal Reserve and this has greatly altered the economy and its overall stability. Whether or not we can extricate ourselves from this mess is a big question. For investors, it means we need to reevaluate our traditional tried and true indicators for whether or not we’re heading into recession or about to have other financial problems.
One example of a lost indicator appears to be the inverted bond yield curve. So far one hasn’t appeared, but that doesn’t mean what it used to. For those not familiar with this indicator here’s a quick breakdown: short term treasury bond yields are lower than long term yields in a normal yield curve. An inverted curve is when the short term bond yields have a higher payback than the long term even with the same credit quality. Dawn J Bennett points out that this indicator may have broken down because of the Keynesian policies practiced by the Federal government have “divorced” the markets from the basics. Another disturbing sign which investors should be aware of is the internal relationship between the two-year and ten-year Treasury bonds seems to have completely loss their correlation.
More interesting information is being released that should give investors and everyone a better idea of the trouble we are in. The St. Louis Federal Reserve recently released a report that removed the deferment and forbearance from the denominator of the student loan delinquency rate equation. This gave us a better understanding of what the true numbers look like and the reality is only 55% of student loans are being repaid and 27% of those are delinquent. Dawn Bennett says it’s reasonable to imagine that of those remaining 45% it is likely a similar percentage will also wind up being delinquent. What does all of that delinquent student debt add up to: the answer is 400 billion.
This is important to investors because this debt is packaged and sold as asset backed security bonds. Since these numbers came out Moody’s Investors Services declared that they would be downgrading the ratings for 14 tranches in 14 securitizations under the Federal Family Education Loan Program (FFELP). This threat of downgrade is something investors need to be wary of.
The U.S. isn’t the only country with a debt issue either, China has recently begun taking steps to secure itself in preparation of a “global liquidity shock”. They’ve started banning certain financing for over-the-counter stocks and margin trades. The Eurozone is also taking similar preparations in the event that Greece defaults and exits from the Eurozone. Another worrisome matter is how little money states have in their reserves. Several states don’t have the needed cash on hand to survive another recession without cutting services or raising taxes. As an investor it’s time to bunker down and find the right solutions which can handle another recession because it appears we may be hitting one soon.
Bennett Group Financial Services LLC, based in Washington, D.C., is a comprehensive financial services firm committed to providing opportunities to clients’ as they seek long-term financial success. Its customized programs are designed with the potential to help grow, lower overall risk and conserve client assets by delivering a high level of personalized service and skill.
For more information, call 866-286-2268 or visit http://www.bennettgroupfinancial.com
Securities offered through Western International Securities Inc. (WIS), member FINRA/SIPC. BGFS and WIS are separate and unaffiliated entities.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org