Election Blues: The consensus is that the upcoming election will be important. However, as far as the economy and the stock markets are concerned, I don’t think so. In my opinion, with either Republicans or Democrats, the economy is going to slow down and huge US and worldwide debt could lead to another 2008 collapse of the stock markets on a worldwide basis. We are on a ship that has already sailed.
A Slowing Economy: The Fed’s Open Market Committee forecasts as of 9/26/2018 are for 2018 to be up 3.1% , up only slightly from 2017 +2.6%, in spite of a 2ed quarter surge brought on by a $1.5 trillion tax cut to the wealthy. Statistics so far indicate that 80% of the tax saving are being used for non-productive use, such as stock buybacks .The Fed’s forecast for GDP growth 2019 is +2.5% and for 2020 +2%. In other words, expect an economic slowdown. Meanwhile, the US budget deficit is forecast to go up 17% to $779 billion and in 2020 to $1 trillion. (This is the end of the myth that the Republicans are fiscally conservative). This will bring US total debt in 2018 to $21.48 trillion up $1.58 trillion from 2017. The Fed funds rate is now at 2.25% and is projected to go up to 3.5% in the next year. Higher interest rates are already slowing the housing market as Startups are down 12.3% and New home sales down 5.3%.
US Debt: Meanwhile US corporate debt of the S&P 500 index has tripled since 2010 to one and a half times annual earnings. This is near the historical peaks of the last 30 years, which were followed by recessions. In addition many companies have gone private since 2008 and are beyond regulatory oversight. As reported in the 9/10/18 NYT, many of these firms were purchased by private equity firms and that these investments “have debt at six times higher than their annual earnings – or twice the level that a public rating agency would consider as high risk or junk.”
The Federal Reserve still has $$$$Four and a half trillion dollars of bonds (acquired during a period of quantitative easing since 2008) to sell back to the marketplace (quantitative tightening) and the banks now own $350 trillion in derivatives ($65 Trillion in 2008). This is like a bomb ready to go off.
World Debt: At the same time the US is recklessly plunging itself into debt, global financial markets have tripled over the last three decades so that in 2008, they were 347% of the world’s GDP, and now stand at 360% of worldwide GDP. In the last ten years the world’s largest Central Banks have expanded their balance sheets from $5 trillion to $17 trillion in order to promote the recovery. Much of this newly printed easy money has bolstered the financial markets. China has printed the most money of any nation to bolster its state companies, which would not otherwise qualify as a good loan. What happens if interest rates rise so that the expense is so large that more debt cannot be issued, as it cannot be paid back?
Crash! While the US markets have gone down a little, at the time of this writing 10/26/18, the Hang Seng index has fallen this year from 33,484 to 24,589, Emerging market EEM shares have fallen from 52.08 to 38.14, the German DAX from 13,596 to 11,051.Deutsche Bank, (Trumps bank and the stock I have called the canary in the coal mine) has fallen to new lows to 9.60 from 20.23 this year and from 144.52 in 2008. Will these markets pull the US market down or will the US markets pull the rest of the world up. In the past I would have bet on the US markets pulling the rest of the markets up. Not now! Don’t be fooled by ‘dead cat’ bounces.
Middle Class Stress: We are faced with what seems like an endless cycle of gluttony, inequality, dishonesty, bigotry, intolerance, theocracy and authoritarianism. We are being ‘distracted’ by the President’s (kleptocratic) daily celebrity theatrics, while the harmful side effects of oligarchy capitalism and globalization have created distress on Middle Class, who find themselves increasingly replaced with automation and lower priced labor. We have taken our eye off the ball as 80 people own 50% of the world’s wealth and the Walton’s are wealthier than the bottom 40% of Americans and all income growth goes to the top 1%. The Middle class is in trouble with 50% of the population unable to meet a $400 emergency. I continue to believe that this economic inequality will reach a tipping point, where all boats will sink.
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Carl M Birkelkbach
Investment Strategy Blog 