The End Of The Bad Old Days

So I’m a cynic by nature and as such being pessimistic has always come as naturally as breathing to me. This, of course, has ensured that I am more inclined to see the dark clouds behind the silver linings than the opposite, however I’ve tamed this instinct well enough to manage objectivity (for the most part).

I’ve shared this because I’ve been predicting a significant downturn in the economy for a couple of years now, having thought things would turn south somewhere between mid 2016 to late 2017. Considering that it is now late 2018, and the economy continues to create positive net jobs, albeit consistently below the 4-year average for Obama’s second term, I was obviously mistaken.

I underestimated the perennial persistence of fund managers and investment bankers to vigorously push the bull market to the edge of sanity, dig deep into private debt, while being aided and abetted by the administration’s corporatist policies, spearheaded by Goldman Sachs alumni in the White House and their cronies in the Federal Reserve to continue to keep the federal funds rate low.

The rich rule over the poor, and the borrower is slave to the lender.
– Proverbs 22:7

While the economy continues to churn along even into 2018, well beyond what I had predicted, two recent events indicate that the gravy train may finally be coming to a long overdue halt. First, the stock market hemorrhaged value on Wednesday and Thursday just weeks after the federal funds rate increased late last month and some high profile bankruptcies loom on the horizon.

Second, Donald Trump publicly complained about the Federal Reserve Board rates hikes that are still not even half the nonrecessionary long-term average. After all, the whole reason the federal funds rate is significantly below 5.0% was to stimulate the economy by keeping the cost of capital low enough that investors could continue to find return on capital investments.

Investors know that increasing rates are now near where the cost of new debt exceeds the margins of return for earnings from additional capital investment. As far Donald Trump and the Republicans are concerned, they know that if the stock market tanks, it will trigger a correction right before the mid-term elections, which would guarantee a Blue Wave that would make the White House even more politically vulnerable.

But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…?
– Alan Greenspan

Donald Trump’s only real legislative achievement, the Tax Cuts and Jobs Act of 2017, hasn’t paid any actual dividends outside of corporate board rooms. Meanwhile, on main street, even while the official unemployment rate remains at historic (and artificial) lows, overall labor force participation remain at 62.7%, a level not seen since 1978, when Jimmy Carter was president (for one term).

The federal funds rate, presently at between 2.0% to 2.25%, has been at economic stimulation levels for over a decade now. Remember the federal funds rate initially dipped below 5.0% in the 3rd Quarter of 2007 at the beginning of the subprime mortgage crisis and plummeted below 2.0% in October 2008 in the middle of the financial sector collapse, almost 10 years ago to the day.

If Trump’s economy is threatened by these long overdue increases in the federal funds rate, then the economy is clearly not doing as well as Trump or his proletariat rubes would have us believe. A confident administration would be touting the increasing federal funds rate as an indication that the economy is returning to normal, so why is this administration not doing that?

Because, this time, it isn’t.

 


Liberty is For The Win!

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