The recent fluctuations in the U.S. stock market have spurred a flurry of discussions among investors. Wall Street experts, private fund managers, and Millennial index fund advocates are feeling the impact of the market’s erratic changes. Even seasoned professionals can’t dodge the market jitters triggered by President Trump’s tweets.
As the DJIA has seen an 8% decline since early October, its short-term implications remain unclear. There is a possibility that stocks may rally until the end of the year—after all, history has shown that unexpected events can shift market trajectories.
However, the real question looms larger: Is this merely another minor dip akin to the one from mid-2015 to early 2016, during which the DJIA fell 12 percent only to rebound? Or are we on the brink of a harsh bear market that could devastate portfolios and disrupt investment funds?
The indicators suggest the latter scenario. Analyzing the evening sky, even the least experienced observer can notice three ominous signals aligning with unnerving accuracy. These signals include a peak in the stock market, a worrying surge in corporate debt, and signs of a waning economy. In essence, the current downturn hints at an impending corporate credit crisis and global economic recession.
The last time we witnessed these indicators converging was nearly a decade ago, corresponding with a catastrophic 50% drop in the DJIA, amid a major credit crisis and recession. We anticipate that the looming crisis will be even more severe and destructive than the one experienced a decade prior.
Bad Habit
Insightful readers may notice that government debt has not been included among the three troubling signals mentioned. This omission is intentional, revealing critical insight.
Undeniably, government debt has escalated far beyond what the most pessimistic observers could have imagined just ten years ago. November marked a historic moment with the widest monthly budget deficit ever recorded in the U.S.
Within a mere 30-day period, the government spent approximately $411 billion while only collecting $206 billion. Our rough calculations indicate that the government was nearly doubling its expenditures compared to its revenue, financing the gap through increasing debt—about $6.83 billion of new debt accrued daily.
Living beyond one’s means is akin to forming bad habits like smoking or swearing. However, accumulating debt with no realistic intention of repayment is a moral failing. Moreover, if the government amasses unmanageable levels of debt with the goal of inflating it away, this verges on the immoral.
Over the years, the U.S. government has amassed nearly $22 trillion in debt. When accounting for unfunded liabilities such as social security and Medicare, the total liability exceeds $115.8 trillion—amounting to nearly $1 million per taxpayer. Quite astounding, isn’t it?
As the population continues to age, the ratio of workers to retirees will shift dramatically, causing these debt figures to rise steeply. Thus, government debt is more than just a troubling indicator; it is a critical one, resembling a star nearing its collapse. The energy needed to stabilize the financial system during an upcoming downturn may simply be insufficient. Here’s the reason why…
How Faux Capitalism Works in America
We predict that the real anxiety among investors will emerge around mid-2019. At this point, corporate America will realize the perilous nature of pouring borrowed funds into overvalued equity shares.
Look no further than General Electric, IBM, and Citigroup for early signs of impending disaster. Over the past decade, GE invested $46 billion in share repurchases. In 2016 and 2017 alone, amidst rising debt, GE allocated $24 billion for buybacks. Yet, during this span, the share price plummeted from approximately $30 to $16. Despite a recent surge after a surprise upgrade from JPMorgan, GE’s stock is now trading at just $7.20. Shares reacquired in early 2016 have lost an alarming 75% of their value. What implications does this hold?
The 2008 financial crisis revealed the mechanics of faux capitalism in the U.S. When major corporations and banks find themselves in peril, executives often evade accountability while securing public funds from their Treasury allies for personal bailouts. This process socializes losses among the less fortunate while concentrating wealth among the elite.
No doubt, the consequences of the extravagant stock buyback trend between 2009 and 2017 will serve as a textbook illustration of faux capitalism in action. Initially, substantial financial bailouts will be allocated to favored banks and corporations, and subsequently, a substantial influx of monetary liquidity from the Fed will be channeled into credit markets and the direct stock purchases of government-sanctioned corporations.
The magnitude of these fiscal and monetary rescue efforts will far exceed the TARP, ZIRP, and QE measures of the previous crisis. Assuming this doesn’t lead to an implosion of the Treasury’s balance sheet or devalue the dollar, a grim reality will emerge: the middle class will be pushed perilously close to poverty while wealth will become increasingly concentrated in the hands of a few.
We find this situation disheartening. We oppose it. Yet, we feel powerless to alter it. This is the reality we inhabit—a reality where justice has been diluted and integrity undermined.
Sincerely,
MN Gordon
for Economic Prism
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