When President Barack Obama was predicted to defeat John McCain in 2008, the markets were already in distress, but then suddenly began to shudder with a lack of liquidity. It wasn’t until a few years later that the correlation between predicted (policy and leadership) and market prices became obvious.
As soon as President Donald Trump became a likely winner in 2016, the markets were boosted. Immediately after he won, there was a gold rush from around the world to reinvest in U.S. stock markets.
During Obama’s last year in office, the Nasdaq traded at the same value as it was during Bill Clinton’s last year in office nearly 16 years before. What we now call the lost generation of workers between 2000 and 2016 is a class of folks who have dealt with several recessions in just the last 18 years.
Now, in 2018, with the new leadership in the House of Representatives and a new speaker, the market has immediately began to pull back. Shortly after the election of a new Congress and speaker, Goldman Sachs announced that it would be taking cash positions.
To make things worse, in the last year, the Federal Reserve has raised rates three times since the president had announced publicly that the rates were high-enough already.
Here are nine market forces affected by the Fed’s actions:
- Mortgage Rates: Mortgage rates are the highest in almost 9 years, moving from 3.99 % this year to about 5% for a 30 year loan. Housing sales will probably slow especially if 401(K)s take a hit which are used by many homebuyers.
- Student Debt: 40 million Americans will pay higher monthly bills on their federal student debt with the new high rate. In 2016, the rate was 3.76%-5.31%, in 2017 the rate was 4.45%-6.00%, and the new rate after three rate increases in 2018 is 5.05%-6.60%.
- Corporate Debt: Corporations with $9 trillion in debt will pay higher debt loads.
- Margin debt in the securities markets is the same, but the rates may be as high as 9.325%, which is similar to the rates in 1999 as the big internet crash began.
- Government Debt Payments: The U.S. government and state governments will spend much less because they will owe another 1% per year on the $9 trillion-$10 trillion in new debt created during Obama.
- Global Investor Confidence: Sovereign investors from Japan, China, Russia, Singapore, Germany, and other super rich states will pull out of the U.S. market due to obvious risks.
- Institutional Investor Behavior: Goldman Sachs concluded recently that spending intentions are down substantially already. The Goldman IT Spending Index fell to 66.5 from 80 in June of this year according to Barron’s Tae Kim.
- Credit Card Debt: The average American had a credit card debt of more than $6,300 in Obama’s last month in office, up about 3% from 2016, based on Experian's annual study on the state of credit and debt in America. Total credit card debt has reached its highest point ever, surpassing $1 trillion in 2017, according to a separate report by the Federal Reserve earlier this year. https://www.cnbc.com/2018/01/23/credit-card-debt-hits-record-high.html
- Federal Reserve Narrow View: The Federal Reserve is independent but most of its members only have limited data with an urban viewpoint. They may be overlooking the economic well being of the majority of Americans who do not reside in corporate and federally funded cities such as New York, Washington D.C. and San Francisco.
All of the key points above, coupled with the Federal Reserve’s speedy rate hikes, have created a potential slowdown like we haven’t seen since 1999. The interest on corporate debt, school loans, credit card loans, and mortgages, and other loans can strip away the spending power of both workers, retirees, and non workers.
While Obama needed only $1 trillion to bail out all of the banks and bad loans, there is now another $9 trillion of debt created by the former president where the interest on that debt could eat away 20%-30% of the government’s budget which is required to take care of those in need.
This week, former Clinton Treasury Secretary Larry Summers said that the chances of a major recession during 2019 are at 60%. Accordingly, it appears that politicians opposed to Trump’s success are determined to slow the economy before the 2020 election cycle.
Overall, the primary philosophical mantra for 2019 might just become “cash is king.”
George Mentz JD MBA CWM Chartered Wealth Manager ® is a licensed attorney and CEO of GAFM ® global education, which is an ISO 29990 Certified professional development company operating in over 50 nations. Mentz is an award winning author and advisory board member to several companies around the world in education, charities, and crypto currency.
© 2022 Newsmax Finance. All rights reserved.