From our pockets to theirs
Last year, we were transfixed by the horror of the 2016 election. So far this year, we can’t take our eyes off the train wreck of Trump in the White House. Most of us haven’t been paying much attention to the economy. It would be smart to take a look.
I am not an economist, nor was I ever any good at stock picking. But I did defend my retirement nest egg pretty well with thoughtful (and conservative) financial planning, by keeping an eye on economic cycles, and with a healthy respect for cash. I’m not offering any advice here. But I am suggesting that we mustn’t let the political pig circus distract us from economic cycles.
Though I said I wouldn’t offer any advice, one rule I honor is this: Pay no attention to anything on television, pay no attention to anything you come across on Facebook, and pay no attention to Republicans unless his name is Charles Schwab. Who, then, do we pay attention to? I look at the track records of economists. For example, Nouriel Roubini nailed the housing bubble and made accurate calls on the financial crisis that was the grand finale of the Bush-Cheney administration. Though Paul Krugman was slow in seeing the housing bubble, Krugman correctly predicted the long, slow schlog that is required for recovery from any banking and financial crisis, as bad debt and unwise debt gets slowly unwound. More than eight years after the banking and finance train wreck, interest rates are still low, as Krugman said they had to be. (While all that time Republicans kept predicting runaway inflation and the destruction of the dollar.)
What are Krugman and Roubini saying at present?
Krugman has had very little to say, actually, about the American economy, simply because the recovery was long, slow, and stayed on course during the Obama years. Krugman was more interested in Europe during the Obama years, actually, because it was in Europe where the proponents of austerity were proving yet again that austerity does not lead to prosperity but does lead to human misery. Krugman remains distracted by politics, but surely he will weigh in before long on current economic indicators — though Krugman has expressed concern that the Federal Reserve was keen on raising interest rates too soon.
As for Roubini, much of his research is now available to subscribers only. But in early May he did write an article expressing concern that markets are ignoring geopolitical dangers to global economic stability, including Russian aggression and North Korea. And if there is a calamity somewhere on the globe — as there almost certainly will be sooner or later — we can be certain that the current occupants of the White House will do everything wrong and make everything worse (unless you’re a billionaire or have fossil fuels to sell).
I was amused a few days ago to come across an article with the headline “Reclusive Millionaire Warns: ‘Get Out of Cash Now.'” From Googling I could see that the article showed up in lots of places that subscribe to cheap or free “news feeds.” These so-called news feeds help feed the swamp of fake news and scam bait that we all are exposed to. I’m not sure what the article was pushing — probably gold or someone’s stock picks. But it’s interesting that Charles Schwab — as honest and impartial a brokerage as I know of — is subtly suggesting that its customers consider increasing their holdings of cash. Charles Schwab himself actually is a Republican, but he’s a San Francisco Republican.
Schwab’s view would be consistent with standard Dow theory: When unemployment is low and when interest rates are rising, watch out for irrational exuberance in the stock market.
Again, a disclaimer: I’m not giving any financial advice here. I’m just saying that we musn’t let political turmoil distract us from the course of the economy.
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I have a degree in economics, and I invest in equities (stocks) and stock-funds or dividend yielding funds. I’m not going to push anyone in any particular financial direction at all, but I’d suggest have a cash cushion just in case and search for dividend-yielding closed-end funds which are plentiful and are made up of an assortment of different securities.
My opinion of the economy is this: it’s pretty robust with a vast service sector to keep things afloat – that is, if another crash should happen, it will be a lot like 2008 – other countries will keep making stuff, and we’ll keep selling it. I’m not saying people won’t lose jobs or retirements, but the economy is a long-term evolutionary system that has traits of an organism to keep it at once devouring itself and seeking out new ways to exist. I was working at a big box office store in 2008 that saw its stock price plummet from near $40 to less than $1. It’s barely recovered but that’s probably because online ordering is finally killing brick and mortar. Since then, it’s undergone some store closings and a quasi-failed merger, but it’s still around and employing people somehow.
Poor areas of the country, like the Delta and Appalachia as I’m sure you’re aware, are as poor and unchanging now as they were thirty years ago. But cities, places where finance is the alpha and omega of job growth, those are the places to worry about potential economic crises. Then again, I see the same types of issues that plagued 2008 lingering around here now: homelessness, destruction of public schools and housing, and white flight.
Economics is about uncertainty and the indiscriminate elimination of old industries and the exploitation of new ones, processes that take years if not decades and become political footballs of the moment. The Milton Friedman-promulgated monetarist school of thought that Bernanke somewhat derived the idea of “helicopter money”, i.e. the Federal Reserve buying treasury bonds to suppress interest rates, is losing steam as the economy, although changed almost completely to only tertiary and quaternary sectors, has nearly recovered. Rising rates won’t hurt much as prices really haven’t gone up noticeably. At this rate, I think rising rates will help loosen the job market by forcing companies to shed some higher paying jobs to afford credit expenditures for innovation and growth. The job market has tightened up about as much as I think it’s going to given that corporations have offered raises and state governments are trying to become viable competitors with the private sector. This all leaves behind those who get left behind: uneducated working poor, small businesses, and those who depend on government sustenance.
What really needs to be the focus of government intervention, which is like looking into a crystal ball at this point, is that of welfare spending in the form of guaranteed basic income. Constant fiscal stimulus will be an inevitability someday in order to keep globalization and capitalism from devouring the poor, and the outright nationalization of natural resources will become a reality in the near future, along with the complete socialization of healthcare and possibly higher education. These issues will be tough truths to swallow and may never come to fruition.
Just in addendum to my essay above, hopefully I’m not inundating you with windbag remarks:
I spoke with a professional investment adviser today who had a genuinely fresh perspective. He’s a CFA with a degree in physics and also a Republican, but he’s insightful, so there’s a silver lining.
He said he thinks the Trump stock rally is going to slowly come to a halt beginning in 2018 but it won’t be because of politics. As the Fed raises rates, which has been happening about twice per year at 25 basis points per raise the last year or so, credit will get tighter and along with it layoffs, less demand for new construction, and the beginnings of a slight recession. He said he expects a bear market to really come into play around 2020 with it lasting roughly as long as this bull market or about ten years.
He said he thinks that oil is going to start ramping up more within the next year or two because, and I’m surprised I didn’t know this, Saudi Aramco is gearing up to release their IPO, and as we know, Saudi Arabia is the big dog in OPEC. Cutting production will send gas prices up, adding insult to injury if we dip into a recession. It’s in the interest of Saudi Arabia and OPEC to cut back to increase the value of their company in between now and the scheduled release of the IPO which is late 2018/early 2019. This should also send up stock prices of other oil companies but hurt everybody at the pump.
He also had some insights about Europe. He said that Macron’s victory in France may just delay the inevitable: the collapse of the eurozone. Italy is basically in the same boat Greece was, and even though France is strong, their is a movement, as noted by La Pen’s campaign, to pull France out of the EU. Germany would be all that’s left of the strong economies if France left, which would all but mean that Germany would have to leave to go back to the Deutsche Mark and leave the euro to the fledglings for it to remain a meaningful currency. The “deepening and widening” of the EU’s powers have all but stripped the individual nation-states of any say in their economic matters, but with the increase in terror attacks in the countries, they almost have just cause to abandon the EU.
Of course, any or all of this could be wrong.
Thanks, Dan. No one can predict the future, of course, but everything you say is very reasonable and well-informed.
Higher interest rates, tighter credit, and higher gas prices will not be good news for Americans, even in the absence of any unexpected and unpredictable geopolitical shocks. It’s the shock events that I worry most about right now.
I know this isnt part of the above subject…and I wanted to strangle “lil marco” during the Comey hearing
H
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