Ashok Dhillon
Apr 16, 201910 min
There are a slew of statements coming out at this time regarding the US economy that at times seem to be pointing in conflicting directions from the same sources. The strength, or the oncoming weakness of the US economy is not only pertinent to North American economies (the US, Canada and Mexico), but will also determine the continuing strength and duration of the current extended ‘bull market’ - as well, to a degree, impact the global economy. So, a brief look at the current signals from the economy, the financial markets, the geo-political tensions, and those from the financial gurus discussing them, may be useful to try and gauge the current status of the economy in the current confusing times.
(Source of the statements attributed to the financial Gurus - recent CNBC articles.)
Recently J. P. Morgan Chase CEO, Jamie Dimon, flush from posting record quarterly profits for the biggest bank in the US, is reported as saying that ‘the US economic expansion that began after the 2008 financial crisis has no expiration date’. He points to ‘the general health of the US consumer, the health of balance sheets, people going back to work, and companies having plenty of capital’.
Based on those and other positive factors he adds, ‘that there is no law that says it has to stop’. He also points out that ‘there may be a confluence of events that somehow causes a recession, but it may not be in 2019, 2020, 2021’. He reiterated, that ‘neither he nor anyone else knows what that confluence of events may be’. [We will discuss some of the confluence of events possible, later on].
Next, the former Chairman of the Federal Reserve, Alan Greenspan, is reported to state that ‘the US economic growth won’t last as the economy labours under the burden of growing entitlements programs, and weakness around the World’. He apparently went on to say, ‘Without any major change in entitlements, entitlements are going to rise. Why? Because the population is aging. There’s no way to reverse that, and the politics of it are awful, as you well know.’
Interesting comments; and we will address them.
And finally, Wharton Professor of Finance, Jeremy Siegel, in an interview said that ‘the biggest threat to the bull market is the potential of an economic recession’. He goes on to say that ‘the biggest head winds that he sees to the US economy are - the economy has slowed dramatically from 2018, and earnings will not be as high as some analysts expect’. He adds, ‘the US Markets expects a favorable outcome to the US-China trade talks and a failure to reach a deal will be negative for the stock market’. He also stated that ‘if a US-China trade does not happen and Trump slaps 25% tariffs on Chinese goods, the market could drop 20%’.
He praised the Trump tax-cuts to the corporate sector, and to small business, and the cuts to regulations, saying that the current administration was more business friendly than the previous one, but worried that if a recession hits in 2020, then the Republicans may be in jeopardy at the next presidential elections. He was less enthusiastic about the personal (for individuals) tax cuts. He cited all these moves by the Trump administration as generally positive for the economy.
On the negative side, he pointed to the tariff and trade wars, and the cut back in needed immigration for the tech industry as a major negative. He wrapped up with stating that if the Republicans lost the Presidency, and the Senate, that would ‘not be good’ for the stock market, even though he thought the chances of the Republicans losing the Senate were slim, he quoted odds of 2 to 1 in favour of them retaining the Senate.
He felt the Fed has already tightened the ‘Fund Rate’ too much to 2.4%, thus inverting the yield curve, and he called for the reduction of rates on May 1st at the Fed meeting. He said that if the Fed tightened again, in the face of ‘weakening news’ that could bring on a recession.
Again interesting comments, considering the Fed stopped raising rates in the face of ‘weakening news’, so why would they hike rates if the economy was further weakening? These are some of the head-scratchers that we want to think about and comment on, because some of the self-evident statements by the ‘experts’ leave us no better informed. So some examination of the current issues regarding the US & the global economy is certainly warranted.
The three financial gurus we focused on are certainly expert and extremely knowledgeable about the financial markets and economic matters, but their comments would seem self-evident to those who are even minimally informed.
Jamie Dimon cites the markers indicating the general health of the US economy - consumers being in financially good shape - healthy balance sheets - and a robust jobs market - as indicators of a ‘no expiration date’ growth trend. He sees only an indefinable and unpredictable ‘confluence of events’ as a possible threat to the ongoing growth, which he seems to indicate is not very likely.
To us Dimon’s sense of confidence in the US economy seems a bit over-confident. And though the consumers are in decent shape, most corporate balance sheets are not in dangerous territory, and the job market is the tightest in years, yet there are a number of worrying economic indicators he did not mention. For instance the auto sector and the housing sector have both shown weakness, as well as the retail industry has been under siege from online shopping and some have been shedding jobs and closing stores, while agriculture, industry and business, in general, have been struggling with the disruptions, uncertainty and higher costs created by Trump’s tariff and trade policies, in the US, and globally.
Also adding to the negative ledger is the record student loan debt which in 2019 has reached $1.5 Trillion. Worryingly, the delinquency rate (payments past 90 days due) has been climbing rapidly over the past years and is now also at its highest levels ever, and with all aspects taken into account, it is unofficially estimated to be about $333 Billion, which is nearing the $441 Billion it took the Treasury Department to bring stability through its TARP program (Troubled Asset Relief Program) after the 2008 crisis. (Source Bloomberg)
And, then there are the ongoing trade wars with China, which might come to a resolution soon, but then again perhaps not. But Trump is still in ongoing tariff battles with Canada and Mexico (over Steel and Aluminium), two of US’s biggest trading partners, with whom the replacement of NAFTA (North American Trade Agreement) now called USMCA (United States, Mexico, Canada Agreement), has still not been ratified by the legislatures of Mexico and Canada, or by the US Congress, and quite possibly may not be, which will bring on more battles within the US, as well as with Canada and Mexico.
Meanwhile, Trump is escalating the trade feud with the European Union, one of the World’s biggest trading blocks.
Additionally, there is the National and Global Debt which is at record levels and climbing, as Trump grows the fiscal deficits, and the Fed and the Central Banks feel impelled to rein in interest rates and turn on the taps, under pressure from politicians, to shore up the sagging economies around the World.
Certainly that has been the direction of the G-20 leaders to their Central Banks, coming out of their recent meeting, as they expressed concern about the global economic slowdown. And China is already on record these past years for undertaking ever more aggressive ‘Easing’ measures to control its GDP slide.
These and other ‘events’ in the US, and around the World, are already impacting US economic growth, and are already slowing the global economy, so-much-so that the IMF, and organizations like it, are downgrading their growth forecasts for 2019, repeatedly.
So, the rather rosy picture being painted of the US economy, by most economic commentators, is suspect in our estimation, and their positive assessment is being undermined by the fact that the Fed was spooked (and pressured) into reversing its rates-hike policy planned for this year, and the Market and White House experts have been calling for even lower interest rates in spite of it.
So we ask ourselves, if the US economy was as robust as being assessed, and as Dimon and others are repeatedly stating it is, then why would lower interest rates be needed now, wouldn’t the rates be rising instead, to stave off overheating?
Recently, into this conflicted scenario steps Alan Greenspan, the former 5 term Federal Reserve Chairman (August 1987 – January 2006), who was called the ’Maestro’ for having boosted economic growth for a prolonged period by ushering in an era of steadily declining interest rates and easy-money policy, fuelling a number of booms and busts (the pre-2000 tech bubble and the Dot.com bust – and the Sub-Prime boom followed by the 2008 bust) after which his ‘Maestro’ moniker became suspect, and his burnished ‘rock star’ reputation got seriously tarnished. Nevertheless, Alan Greenspan is still respected as an iconic former Fed Chair, and his views are still eagerly invited.
In a recent interview, Alan Greenspan rang an alarm bell about the inevitable rising costs of ‘entitlements’, due to the aging population, which according to him were difficult to reverse and which would put a heavy burden on economic growth, along with the slowing global economy. We don’t have a problem with his statement, as we agree both situations are a growing reality.
As to the threat of slowing global economic growth, all governments are already aware of that reality and are taking active steps to reverse the impact on their economies with directions to their Central Banks to additionally ‘ease’ monetary conditions, more than they already are. For the growing burden of ‘entitlements’ from aging populations, the solutions are far more difficult to enact, except to point out, that this problem has been identified years ago but governments have not taken adequate steps to address them, because that would have required fiscal discipline and bi-partisan planning and commitment, both of which US government does not do very well, if at all.
But there is another aspect to the ‘entitlement’ issue, particularly in America; it is simply not considered in a positive light as it is equated with government hand-outs to those who are either lazy or parasitic, a manifestation of ‘socialism’ and not as is perceived in the other advanced countries, as the real responsibility of governments towards the majority of the populace that have worked and contributed to the vast majority of the taxes collected by most governments.
If working individuals have contributed the most to government revenues, both the Federal and State, approximately over 83%, as is the fact (see charts below), then they are certainly entitled to most of the benefits from the tax revenues, which proportionately, to their lifetime contribution, they do not get.
But in America, the country of skewed capitalism, just as it is the country of skewed democracy (the one with the most popular votes does not necessarily win), the rich and the business community have convinced the public that those who have, should get more - and those that have not, what they have should be taken away too. And that is upright capitalism America-style. Hence the widening gap in wealth and inequality among those that have, and those that have not.
This is not to say, rising costs of social programs are not a problem, but it is to say that if the majority of the tax revenue, by far, is from individuals, both for the Federal and State governments, then they need to be looked after properly, because without their well being there is no economic strength to a country as the top 1 to 10% cannot do all that is required to have a functioning economy, no matter how brilliant they may be. They need the grunts to do the work - or foreign workers in factories in foreign locations. Which is what was happening and it was not making the country great, according to Trump.
Yet his and the Republican’s famous tax-cuts benefited primarily corporations and the wealthiest in America (ironically about 80% plus of the benefits), who pay less tax than the working class, by far, because of all the special loopholes, subsidies, grants and R&D investments that are tax deductible, as is their much publicized philanthropy. (Some of the more honest and wealthiest Americans, like Warren Buffett, Bill Gates, and even Jamie Dimon have confirmed that fact).
So the answer is that the additional tax revenues to meet the rising costs of ‘entitlements’, due to the aging populations, must come from the wealthier individuals and corporations, and from the reduction in the huge waste in all levels of governments, Department of Defense, the cessation of the very expensive and wasteful wars, the mitigating of Wall Street corruption, and the reduction of the endless sops to the richest corporations and individuals. Additionally, the ridiculous cost of a highly dysfunctional healthcare system needs to be radically altered by looking to all the other advanced countries, etc.
Most advanced countries do better than the US in most of the above. And they are just as prosperous, and happier, by almost all international metrics, and safer.
Finally, Wharton Professor of Finance, Jeremy Siegel, identifies the threat of an economic recession as a threat to the extended bull market (one of those self-evident statements), along with the fact that according to him, the economy has already slowed ‘dramatically’ from 2018 (here he seems to be at odds with all those that consider the economy to be growing strongly at this time), plus he expects corporate earnings to be weaker than being currently projected by market analysts.
We tend to agree with Professor Siegel that there is a credible threat of an economic recession because of a slowdown in the US economy, and an inarguable, measurable decline in global economic growth in the global economy.
And it’s likely that corporate earnings are going to be weaker than expected.
Plus, there are just too many threats in the geo-political arena that have the possibility of coming together as the ‘confluence of events’ that Jamie Dimon mentions as a remote possibility, but we believe are much more real than remote, and quite possible in the near to medium term, in their all-too-real presence. We also feel that the continuing trade & tariff wars, the risk-raising slowdown of the economies of China and the EU, the relatively high valuations of the stock market as it now sits, and the ultra-low bond yields, all are swirling as the possible ‘confluence of events’ that continue to pressure economic growth.
The material possibility of a recession is now starting to worry Trump and his administration who are getting louder and more insistent in demanding aggressive rate cuts by the Fed. Coupling that reality with most of G-20 asking the same of their Bankers is a sure sign that global slowdown is more insistent than just a quarterly blip.
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