In my early teens, I looked forward to watching Abbott and Costello on Sunday afternoons. One of the great comedy routines made famous by them was: “Who’s On First?” The premise of the sketch has evolved to many forms, but the template is that Abbott is identifying the players on the team for Costello, but their names and nicknames can be interpreted as non-responsive answers to Costello’s questions. The comical banter starts out with like this:
Abbott: “As strange as it may seem they give baseball players very peculiar nicknames. You have Who’s on first, What’s on second, I Don’t Know on third…”
Costello: “That’s what I want to find out. I want you to tell me the names of the fellas on the team.”
Abbott: “I am telling ya, You have Who’s on first, What’s on second, I Don’t Know on third…”
Costello: “You don’t know the fella’s name?”
Costello: “Well then, who’s playing first?”
Costello: “I mean the fella’s name on first base”
Costello says “The fella playing first base for St. Louis?
Abbott says “Who”
Costello: “The guy on first base.”
Abbott: “Who is on first!”
Costello: “That’s what I’m trying to figure out”
For the skit of the game of baseball the banter back and forth, with a small amount of a confusion completely described each player’s name and role. In the “game” of United States economics, it can be riddled with uncertainty causing great financial pain. But it doesn’t have to be that way. If knowledge is power, then it is imperative to understand the players, their role, and their behavior in the game. They all influence the economic environment at some levels. They do interrelate with a delicate cause and effect on the economy, the Stock Market, the Dollar, Gold, and how the rest of the world interacts with the United States.
United States Economics: The Main Players
The President and the Economy
Historically, the policies and actions of presidents has a strong correlation to the economy. Our current president is more of a business minded man than a politician. For that reason, myself and many others voted for him. We all believed this would work in the favor of Americans, jobs, and the economy. There is a certain amount of a correlation to following in the footstep of President Reagan. Just like Reagan was the job creator that caused an economic boom, our debt also ballooned from $800 Billion to $2.3 Trillion 8 years later. The debt to GDP was low at 34%, but now is 104%.
President Trump removed many obstacles against businesses and also in the banking industry that drove an economic boom. Giving a corporate tax cut also gave a major boost to the economy. Unemployment goes to a 40-year low of 3.8% while the median U.S. household income rises 1.8% to a record of $61,400 in 2017. A blockbuster GDP growth pace of 4.5% in the 2nd quarter is the fastest in nearly 4 years. The World Economic Forum has recently named the United States as the “world’s most competitive economy” for the first time since 2008. The highlights from the report praised America for its entrepreneurial economy and robust financial system, but warned about signs of deterioration. Those benefits have come with a great price tag when it comes to our debt, which I will describe in The Government Debt section.
The Stock Market
The U.S. stocks boomed the day after election day in November of 2016 and really didn’t adjust until late January of 2018. The market anticipated all the previous things I mentioned that President Trump did which had a direct cause. Stocks had a double digit increase in 2017. Because of the boom it got ahead of itself. I said in the first week of January 2018 this would be a very volatile year for stocks. I also said the Fed, in unwinding their balance sheet first time in 2018 (end of January) and in the fall at full capacity (In October), would cause massive volatility. Previously the market beat its consensus in earnings expectations. But now the market has to ratchet itself down in reference to earnings. The market has to lower its expectations. This market is digesting this for the first time in almost a decade.
Myself, as well as several billionaires, (whom are very well respected hedge fund managers) said 5 weeks ago that there will be a downturn in stocks. Names like Ray Dalio, Stanely Drunkenmiller, David Tepper, and Jeffrey Gundlach all hit the mark in calling this downturn while Wall Street was saying a huge economic boom is still in order. The Dow, the S & P 500 and Nasdaq all fell through support levels. The Nasdaq is down 11% in October, the biggest monthly loss since Oct 2008. The S & P 500 has fallen 14 of the past 17 sessions and 4 out of 5 weeks. Only 12% of the S & P stocks are above the 50-day moving average (a major support level) while more than half of the S & P stocks are down 20% or more.
A decade after the financial crisis, the seeds are being sown for the next potential meltdown. This time, the tinder isn’t subprime mortgages, but a mountain of risky corporate debt that looks eerily similar. UBS estimates there’s a record $4.3 trillion in lower-quality corporate loans and high-yield bonds – up from $2.4 trillion in 2010 – that could begin to see rising defaults if the healthy U.S. economy starts to wobble.
I view this as the most severe threat to the economy and financial system
says Mark Zandi, chief economist of Moody’s Analytics. This debt has to be serviced, and serviced at higher rates. This big chunk of corporate debt could stall, further slowing the economy that is now starting to sputter. According to Chief Magazine, CEO confidence is currently at the lowest level of 2018 and also the lowest in the past 12 months. The three main concerns amongst CEO’s is:
- Rising interest rates.
- Fears of inflation.
- We are at the end of the business cycle.
Currently our National Debt is at $21.4 Trillion. Our country’s debt has shifted into high gear since our government has been near doubling the National Debt for the last two Presidents, Obama and Bush. The projections of debt under President Trump show a slight faster pace than that of Obama. Obama, in an 8-year term, added $8.59 Trillion to the National Debt. During the 2016 presidential campaign, Republican candidate Donald Trump promised he would eliminate the nation’s debt in eight years. Instead, his budgets would add $4.8 trillion in four years. It would increase the U.S. debt to $24 trillion. If we make the projections for President Trump to be our President for 8 years with the same spending revenue ratio, after his 2nd term the National Debt is projected to be $30 Trillion. For every $1 the government is spending we are going into debt $1.50.
Treasury Bills are issued when there is not enough revenue coming in to fund the government and the obligations we have committed to in the budget. In 2016 the Treasury created a total of $440 Billion. In 2017 the Treasury created $519 Billion, the highest since 2010. The Treasury injected a considerable amount in 2009 and the Fed bought those assets. Otherwise, it would be fair to say that 2017 is the year that the most Treasuries have ever been created in one year to fund the over spending of our country. That, you will see, is nothing compared to the huge increase in 2018.
Increasing Treasuries by 160% from 2017 to this year is confirming two things:
- We have a massive spending problem that is out of control
- The rest of the world is not wanting to buy our debt and finance the United States like they did previously.
Related: Tariffs: The Untold Story (Part 1)
The Federal Reserve has been raising interest rates to normalization which is somewhere around 3.5%, while it is unwinding its balance sheet of $4.5 Trillion to under $1 Trillion. The Fed this October will be at full capacity selling $50 Billion a month of Treasury Bills and Mortgage Back Securities. They will continue this behavior until something breaks. The unraveling of their balance sheet confirms we are going to have another recession, otherwise there would be no reason to sell Treasuries. They have said over 5 years ago once they start this process it will cause economic uncertainty in stocks and raise market fluctuations to a possible severe level. That is what the current environment is.
The current environment is that we are in a Bull Market with a minor correction rather than a Bear Market. Many believe it is a late-inning game. David Tepper, the billionaire hedge fund manager, confirmed that in early September he began reducing his stock holdings by as much as 30%.
The recent downturn in stocks has caused a flight towards Gold causing it to move up through $1200, a psychological barrier and $1225 a technical resistance. Commerce bank said $1300 Gold by the end of the year as well as Bank of America also citing $1300 Gold by years’ end. Goldman Sachs said the average price of Gold in 2019 would be $1350. Prior to this flight toward Gold, central banks saw it coming. Hungary surged their Gold holdings by more than a 1,000% 3 weeks ago. China and Russia also bought Gold. Hungary, Poland, and Austria all repatriated their Gold from the Bank of England and also the Federal Reserve in New York. Repatriation of Gold means they called in their Gold that was being stored in another country. On a side note if you have gold or silver in a depository, you should call my office and learn how to get your wealth in your hands.
The End Game
So many lives were forever changed financially in 2008. Unfortunately, we have not moved far from fixing those core issues that almost brought our financial system to its knees. Due to the unsurmountable size of our debt and the servicing of it, now is a time to pause, be cautious and act. The billionaires I listed before; Dalio, Drunkenmiller, Tepper, and Gundlach, all hit the mark recently going against their rivals. By their historical track records of predicting market movement this catapulted them into a class of elite billionaires. A wise investor would have to stop and pay attention to their biggest prediction of all and not ignore their current dire warnings. They are all saying a major reset is going to happen in 2019 or at the latest 2020 that will be greater than 2008. The Dollar will fall 30% or greater, corporate and government debt will be unmanageable. This recession will run deep and could last over a decade, hitting all American in every asset class. To prepare for this they are suggesting to limited your holding in stocks and diversify into Gold.
You won’t have to think ”Who’s on first?” You will be home safe!