Equities and the economy


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If you invested in the Chinese markets, or for that fact the entire Emerging Market Index, now down 20 percent this year, you’re stuck in bear territory.

If you put your money in the American markets, you’re riding on top of what is now the longest bull run in U.S. stock history.

What’s next?

On the tenth anniversary of the Panic of ’08, from the chorus of mainstream business media analysts to gloom-and-doomer economic “experts,” predictions for a historic, monumental crash of equity markets worldwide are growing louder.

Many of these analysts cite tariffs, trade wars and other reason-of-the-day causes as potential triggers of the economic Armageddon to come, but those are false flags.

We have identified a series of trigger points that can ignite significant downward trending in equity markets and economies, such as rising geopolitical tensions and accelerating interest rates in the U.S. and in nations pressured to dramatically raise them as their currencies decline.

On the economic front, the media has, and will, continue to blame trade wars and tariffs as the primary reason for triggering market turmoil. In fact, when the major market correction occurs, they will falsely attribute it to a trade war.

However, it is rising interest rates that will negatively impact governments, equity markets, real estate, retail and other commercial/consumer sectors.

And should the U.S. Federal Reserve continue to raise interest rates two more times this year and three or more in 2019, it will accelerate downward economic pressure in both developed and Emerging Markets.

Unlike 2009 when central banks flooded the markets with bailouts, negative/zero interest rate policies and some $20 trillion in quantitative easing bond buyback schemes, with interest rates in the U.S., Japan and Europe still at or near historic lows, much of the central banks’ tool box to rescue global markets and economies from an economic shock will be running on empty.

This decade-long financial strategy created by the world’s central banks and governments that treated the symptom, but not the cause, is unsustainable.

For example, while many equity markets struggle, in the U.S., the record-breaking markets and the second quarter 4.1 percent Gross Domestic Product increase was in large part a result of President Trump’s $1.5 trillion tax plan.

It was Trump’s corporate tax cut from 35 to 21 percent that incentivized corporations to buy back their stocks at a record-setting pace of an estimated $1 trillion this year, instead of making capital investments as was sold to the public.

And the market for collateralized debt obligations and leveraged loans has surged, with volume for loans used in leveraged buyouts up 33 percent. Thus, with collateralized debt obligations and leveraged loans up 51 percent year-over-year in the first half, when the economy slows down while interest rates rise, defaults will dramatically escalate.

HOW WE GOT HERE. THE BACKSTORY

A decade ago, global trend forecaster Gerald Celente, who coined the term, “Panic of ’08,” was among the first to predict that the era of reckless credit practices, turning housing value equities into easy sources for cash, and unregulated, unsecured lending practices that provided easy credit, especially mortgages, to people who couldn’t afford to pay, would crash financial sectors and general economies.

But since bottoming out in 2009, while equities soared and economies have grown, central bank policies have not benefitted the middle class or lifted the standard of living for working families worldwide.

In America, the richest one percent now takes home 20 percent of the nation’s income and owns over 40 percent of its wealth. It is also estimated that 95 percent of the wealth derived since 2009 has gone to the one percent.

As we have reported in our Trend Alerts and Trends Journal articles, when adjusted to inflation, wages are stagnate for the working class. Moreover, much of the modest increases in wages the government reports are attributed to the fact that many are working more jobs and longer hours … a fact that is under-reported, if at all by the media.

THE WORLDWIDE DEBT EPIDEMIC

The debt held by governments, households and major companies in developed and major EM nations rose by more than $8 trillion in the first quarter of 2018 to $250 trillion. That’s a record-setting 11 percent increase over last year.

In the U.S., with household debt at $13.29 trillion, and rising at a rate 60 percent higher than the increase in wages, it is now at an all-time high. Up $454 billion from a year ago, it marks the 16th consecutive quarter of increases.

Americans today owe nearly 30 percent of their income to revolving credit debt, giving them less to spend and virtually no margin to absorb additional expenses, including higher revolving credit interest rates.

So cashed strapped are they that 60 percent of Americans don’t have $500 in savings and four in ten say they would be unable to afford a $400 emergency expense.

Moreover, for deeply indebted, cash-poor consumers, when interest rates rise they will find it increasingly difficult to manage their debt load.

GOVERNMENTS CAN’T HANDLE HIGHER RATES

Beyond consumers unable to handle their debt load, as noted with some $250 trillion in worldwide debt, and with the U.S. government, for example, over $21 trillion in debt, as interest rates rise so too will the cost to pay off the massive government debt.

As for EMs, the higher the Fed raises interest rates, the stronger the dollar grows, and in turn, their currencies weaken. And the lower their currencies fall, the costlier it is for EMs to pay back some $63 trillion in debt, much of it dollar based.

Further, EM countries are increasingly falling into recession and stagnation, not only pushed downward by the sustained devaluation of their currencies, but with falling commodity prices, nations such as South Africa, which is now in recession, will suffer further weakening economic fundamentals.

Thus, we forecast that with rate hikes hitting when major markets, such as China’s and Europe’s are slowing – and with global debt at an all-time high – a ticking economic time bomb is set to crash economies and markets worldwide.

And to stop rising inflation and crashing currencies, Turkey, Iran, Argentina, Russia, Egypt, India, Indonesia, Venezuela, Ukraine and others troubled economies are raising interest rates … some of them sharply.

While these measures may lessen the downward pressure on their currencies, the high rates will stifle economic growth as the cost of borrowing increases.

ECONOMIC WARFARE IS BEING WAGED

Worsening the currency crisis on a global level are President Trump’s aggressive sanctions against Russia, Iran and Turkey, which they claim is “a declaration of economic war,” “naked economic aggression,” and “economic warfare,” respectively.

With crushing sanctions against oil exports from Iran, one of the world’s largest exporters, set to take effect in November, and with Middle East tensions between the U.S./Israel/Saudi Arabia alliance heating up against Iran, Syria and other Mid-East countries, the price of oil, now hovering near $80 a barrel, can skyrocket.

Since oil is a dollar denominated commodity, the role spiking oil prices plays in threatening EM and developed nations economies is crucial. For example, India imports 80 percent of its energy. With its rupee down 14 percent year-to-date against the dollar, should oil prices, which are dollar based, continue to spike, its economy, as well as those of other oil-dependent nations, will suffer dramatic GDP declines and larger trade deficits.

WARFARE

With the threats of both economic and military warfare increasing, particularly in the Middle East, oil prices could exceed $100 a barrel which we forecast will crash markets and economies worldwide.

The last five economic recessions all were preceded by a spike in crude oil prices. Should history repeat itself, gold prices, which we forecast are at or near its bottom, will sharply spike. TJ   


TRENDPOST

We forecast the impact of rising interest rates will be unmanageable for many EM economies as well as developed nations, especially those deep in debt.

As noted with Japan, the European Union and other nations with rates still negative or historically low, and with China’s economy weakening, there are no major currencies that will challenge the dollar’s strength.

Thus, the stronger the dollar grows and the higher U.S. rates rise, the deeper already troubled economies will sink into recession … and so too will the prospects for a contagion effect that will spread across the globe.

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