Dividends and Red flags in the economy

When you listen to politicians speak about the economy, they will tend to highlight the positive and by many measures there has been growth in the economy, that is a good thing. The politicians speak about number of jobs created, while we must remember with the baby boom retiring, there was going to be a need for more people to replace the ones retiring. That said, on a individual basis creating jobs is a good thing.

In terms of the economy, debt is a red flag, whether it is corporate or personal because debt has to be repaid or some financial institution must take the lost of not receiving money – write downs. In the banking sector, the lower the write down or provision for loss, the higher the income for the bank. In early Feburary, in an article by Jonathan Spicer of Reuters reported on a the US household debt and credit report issued by the Federal Reserve Bank in New York. The report showed overall debt edged up to $13.5 trillion in the fourth quarter of 2018.

When looking at that number, mortgage debt makes the largest slice as it should as most people need to go into debt or have a mortgage to buy a house. Mortgage debt as an indicator is a good thing for the economy. Hopefully people qualify and have the ability to repay the debt.

Consumer spending accounts for 2/3’s of the growth of the world’s largest economy and it is expected to hold strong this year.Consumer debt is different – it is made up of credit card debt and car loans. Ideally those purchases on credit card are more toward the want rather than the need and for the most part they can be paid off. The reality is for more and more people, credit card debt is for normal daily spending. In good times, credit card companies (including banks) give credit cards with greater ease but good times are ending as serious dlinquency for credit cards rose 5% up for 4.8% or 1 out of 20 people.

Student debt remains high because many jobs require post secondary education and the fact that people go is a good thing. By most standards, the rewards for the majority are lessing but gaining a job afterwards on close to minimum wage tends to mean student debt delinquencies are rising. The issue is that if someone declares bankruptcy to write off their loans, student debt still has to be paid.

Car loans are the big issue in the report. A record 7 million Americans are 3 months or more behind in their car loans. There is a limited discretion with cars because people there are different prices for new and used cars. However most jobs still require people to have a car because of where they live and work and public transportation may not be that good or will take extra hours in the day to get to. The good thing for companies that give car loans is they can relatively easy tow the car and try to sell it again. On You Tube there is a gentleman name Dave Ramsey and he always says – do not buy the car you want, buy the car you can afford. By a beater car, then move up as your debt goes away. Most people do not do that, they buy the car they want.

Linking to dividend paying stocks, all companies have head wins or what keeps the President up at night. What does the executive team worry about? Listen for the good news, but ask about the red flags, so you can sleep at night.

There are more questions than answers, till the next time – to raising questions.

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