“No problem can be solved from the same level of consciousness that created it” – Albert Einstein
Stock market action for the month of December has been uncharacteristically negative for this time of year
Things were so bad, even the day prior to Santa’s scheduled arrival stocks ended up on the losing side of the column. The losses, some 653 points to the downside,
turned out to make it the worst pre-holiday session in the history of the DJIA.
But the day after Christmas the market witnessed a remarkable about-face with stocks charging back 1,086 points and another record
— the best single-day gains in U.S. stock market history.
These historic book ends made for a fitting conclusion to a year that provided plenty of excitement and economic suspense from beginning to end.
the of the year 2018
So, with the lump of coal investors received Christmas eve turned into dust under the hooves of a resurgent bull stampede, it might be a good time to reflect on some of the more significant news and events witnessed over the last twelve months.
You may recall how stocks picked
–up right where they left off last year with much of January spent setting new highs and recording the best start to a new year since 1997.
Inflation remained relatively low due in large part to a $25 per barrel decline in the price of crude oil and a near
Unemployment held relatively steady averaging just under 4% with job numbers exceeding forecasts throughout much of the year.
Meanwhile, the Federal Reserve continued pushing up interest rates despite a growing number of calls for bankers to consider slowing or pausing their rate normalization program.
,n Wednesday, August 22nd, we officially entered the longest bull market in modern times at 9½ years.
Then, another record fell on October 3rd as the Dow Jones Industrial Average rallied to its highest price level in history, closing at 26,828.39.
, during the month of October, the Conference Board index of consumer confidence rose to an 18-year high indicating a high-degree of optimism for the economy by Americans —
Taken individually, these headlines might seem to indicate we’re in one of the strongest and most prosperous economic periods seen in decades, but is that really the case?
Let’s dig a little deeper and see what we can find.
This year, like the last and many before it, the government proved once again completely incapable of turning away from the easy money window over at the FED and proceeded to bury the middle class another $1.37 trillion
deeper in new debt.
That means government, in all its infinite wisdom, grew the deficit at a rate of at least 6.6 percent, according to the latest Treasury Department figures
But the debt meme doesn’t end there.
Reports put US household debt
now at approximately $13.3 trillion
Student loans also remain in high demand, having surged from $611 billion in 2008 to nearly $1.6 trillion today.
Auto loans, at almost $1.5 trillion, have also exceeded their 2008 totals with an ever-increasing percentage of these loans being relegated to junk status, according to industry analyst Michael Alkin.
Additionally, the U.S. corporate debt market has grown to levels never seen before
— It seems c meaning corporate America has been borrowing money toboost stock prices via share buybacks, making dividend payments, and financing mergers & acquisitions — instead of investing in future growth and expansion, something typical of the past.
But what do the experts have to say about all this?
…And The Ugly
The historic and ever-growing mountain of debt may be part of the reason Goldman Sachs earlier this year described their fiscal outlook for the US as “not good,” and went on to say our current path could threaten the economic security of the country when the next recession arrives.
Striking a similar tone Ray Dalio, founder of Bridgewater Associates, the largest hedge fund on the planet, said recently he believes, “We will have low returns going forward for a long time.”
In April the International Monetary Fund (IMF) warned
, “ That rising debt levels are a growing risk around the world” and that not enough was being done to improve debt restructuring and enact measures for responsible lending and borrowing.
Then, in September, the Bank of International Settlements added to the chorus by cautioning the global economy risked a “relapse” of the decade earlier crisis explaining there was little “medicine” left to treat the patient a second time.
The medicine they’re referring to is of course more borrowing, and more debt.
Back to the Future
begin , nearly unfathomable
As I’ve mentioned previously, debt
, when used wisely , can be a powerful financial tool. But , when instead used irresponsibly and to excess, the results can be disastrous.
For individuals, overborrowing can lead to bankruptcy and financial ruin.
But a country taking on too much debt completely can lead to a myriad of consequences —impacting everything from the value of its currency to interest rates, even effecting its ability to deliver on basic services. Debt is a double-edged sword . As we together enter into the new year , total global debt is now approaching Error! Hyperlink reference not valid., a truly astronomical number.
All of this begins to make sense when you consider how lower interest rates tend to encourage more borrowing
— sort of a fiscal Catch-22.
Economic growth under Trump is about the same as it was under Obama. In other words, there is no growth miracle, just more of the status quo.
, why do we have any growth at all?
Jeffrey Gundlach, the new “Bond King,” say
s the answer is it’s been the debt: “Nominal GDP growth over the past five years would have been negative if U.S. public debt had not increased.”
So, iWell, w at a rate
unfortunately Americans (side)
That’s to say, don’t go away, and
We all know when given the choice between doing what’s right or applying a quick fix, the average politician will always take the easy way out. It’s called
‘political expediency ’, and is defined as the quality of doing “what’s convenient despite possibly being improper or immoral.”
all advocating , of course, ato
For decades, phave taken the approach if you’ll just throw They now find themselves
If growth in the U.S. has become unsustainable without constantly adding to the debt, how sustainable is the increase in debt? Whenever debt grows faster than income it increases the likelihood of default through inflation, restructuring or nonpayment. In that case only the timing is in doubt, but not the outcome. Going forward it’s important for all of us to remember , especially retirees, that markets don’t keep making record highs forever , Don’t be fooled and fail to recognize and whow much of what we hear about the so-called economic recovery has to do with the accumulation of more and more debt , versus realold-fashioned, growth. The stimulus intended by lowering interest rates, quantitative easing, and other unconventional monetary policies have failed to yield clear results and the effectiveness of this great economic experiment will likely be the subject of debate for decades to come. Additionally, while the tax cuts may have provided a short-term economic boost, the deficits they create can follow us around for a long time. So , it would seem we’re faced with a delusional government promoting the myth that deficits really don ’ t matter — rather, you can simply “ stimulate ” the economy and grow your way out of debt by spending more and more money you don ’ t have. It appears policy makers in D.C. believe there ’ s no problem that can ’ t be solved if you throw enough money at it. It seems they ’ re trying to cure a massive debt problem by dragging the country ever deeper into debt. Takeaway
, I’m surprised by the number of people who seem to regard the current economic situation as little more than a bump in the road, suggesting that , “when things get back to normal ,” we won’t have this to worry about anymore.
But what if things don’t get back to normal?
What if we’re already living in the “new normal,” and what if this is as good as the economy gets for the next decade or two, or perhaps longer?
Is it out of the question to consider the idea the world really has changed, and that we simply can’t go back to a place that no longer exists?
What if we
were all to wake up one day to find our economy stuck deep in the mud
Objectively, it’s just the kind of thing
the sort of thingour massive debts portend, and it’s all happened before. In fact, it’s happening right now throughout Europe and in Japan, which was until recently the second largest economy in the world.
Of course, no one can
Zero growth.Since wrule out the same kind of thing happening here ,unseen, a ,wouldn’t it make sense to consider how your current retirement plan might perform in that kind of economic scenario?
The April IMF Statement went on to say, ”…now is the time for countries to get their houses in order to prevent and prepare for future financial crises.”
That’s good advice, and not just for governments and their policy makers; it also makes sense for most individuals and retirees as well.
For anyone serious about succeeding in retirement, I hope you’ll carefully consider the implications, and the potential consequences of everything we’ve discussed in this article.
With that, I wish you all the best for a safe, healthy, and prosperous 2019.