Crash or No Crash
A cura di Walter Snyder, Swiss Financial Consulting
The US stock markets have been hitting new highs recently with the result that it seems as if there is hardly any risk involved in investing in US dollar equities. Even if the FAANGs account for most of the north-bound movement and large numbers of companies have seen their quotations headings southwards, Wall Street hype glorifies the advances made so far and the presstitutes follow along like lemmings.
This Newsletter has noted that the current rally has taken place in a low- or even zero-interest and sometimes even in a negative-interest environment accompanied by huge stock buyback programmes that have enriched corporate management with simultaneous dividend payments that have been financed by excessive debt. Real productive capital investment has decreased at the same time, which contributes to a stagnating economy that will have little resistance when the next recession comes.
The Fed is now contemplating further interest rate increases and has announced that balance reductions will be implemented beginning in October. It is well known that the Fed is usually behind the curve and regularly inaugurates recessions despite its good intentions. Many asset managers who followed low-risk conservative policies have lost their jobs as have CEOs who did not increase company debt in order to buy back shares in order to boost P/E ratios. Investors who did not join the party remained behind and lost an opportunity to revalue their portfolios. By now, of course, many market observers have begun warning that equity prices are extremely high and that the current bull market is the second-longest in history.
It is extremely difficult to predict when the next correction or crash will occur though this Newsletter has opted for October 2017. So far this month nothing of the sort has taken place. The US Congress has postponed the debate on raising the debt ceiling until December and will have to spend even more for hurricane damage in Puerto Rico. One can reckon that the US is going to have sovereign debt that exceeds 100% of GDP and that the Fed is going to be raising interest rates. A question that arises is how the budget is going to accommodate the increased costs of serving the debt.
Consumer debt in the form of credit card debt, auto loan debt and student loan debt is also high. Mr Trump is expert at handling bankruptcy cases and his expertise may be required to avoid worst case scenarios for US debt if inflation, higher taxes and haircuts do not solve the problem. The question is “when”, not “if”!