The DOW, NASDAQ and S&P500 are all working with record closes. The stock market has essentially completely recovered from the 2008 crash, even if growth has been substantially slower than it could have been. In spite of what would seem like good news, tons of economists are wary, if not downright pessimistic. What has them so worried?
Politics
To be fair, global politics are always volatile and almost always offer market threats more than boons. On top of that, election years have historically been slower for the American economy. That said, there are specific concerns related to the politics of this year.
The first thing that comes to mind is Brexit. It didn’t lead to any immediate problems in the U.S., but most experienced economists are not surprised by this. The long term is much murkier.
The biggest threat with Brexit is that Britain used to be America’s largest supporter within the EU. They helped leverage trade regulations that were good for the U.S. Without Britain, the EU will not necessarily create worse situation for American trade, but the whole situation is much less predictable.
Of course, this conversation inevitably floats towards the general election this year. Regardless of who wins, there will be repercussions for the U.S. economy. If Hillary wins, you can expect increased regulations that will slow production and increasing investment and corporate taxes that will stifle economic growth altogether. Essentially, it will be Obama 2.0, and none of it particularly exciting for investors.
If Trump wins, reduced regulations and taxes could spurn huge economic growth, but a large number of international and left-wing capital holders may hold back as a political statement. In either case, there is plenty of turmoil, which always makes economists nervous.
Subprime Lending
This is not the first time you’ve heard mention of subprime lending. If you haven’t already read up on subprime lending, here’s the gist. Banks are increasingly targeting poor credit borrowers in a large number of markets. This is primarily what lead to the housing collapse of 2008, except on a much smaller scale.
The problem is that subprime lending is becoming so popular in so many new markets. Student loans and automobiles are more obvious targets for lending, but personal credit cards and even retail lines of credit are catching onto the trend.
If the major banks don’t revise their lending strategies in the next year or two, there will be a collective debt bubble that can present the same level of threat as the mortgage bubble did.
Rising Interest
More than everything else, this is the biggest cause for concern. The Fed has made it clear that rates are slated to rise. A lack of confidence has pushed things back, but the economy is steadily growing and the rate hikes will follow—most likely in the next 6-9 months.
When that happens, it will mean an acceleration of debt across the board. All of the subprime borrowers who are making these smaller but still significant bubbles will further drown in their debt.
That will cause the bubbles to grow, so even if banks change their general lending policies in response to a rate hike, it will be too late to stop a near exponential rise in personal debt across the country. Each of these subprime markets will see a hike in defaults.
Further putting strain on the issues is the national debt. Regardless of who wins this November, you can expect the national deficit to continue to rise. If trends continue as they have the deficit could potentially spike, then interest alone will be the third largest item on the national budget by 2023.
This presents potential for an exponential rise in national debt regardless of spending, and that is what has every professional economist most worried. Without a complete overhaul of the nation’s spending and budget, a runaway debt train is inevitable.
As alarming as all of this feels, it isn’t all bad news. Most of these problems have plagued the country all year and economic growth has accelerated. Ultimately, if employment can sustain, then Americans stand to produce and earn enough to handle just about any crises that is currently threatening.
So, what is the lesson in all of this? It’s ok to invest and take some risks, but the security and prosperity of the 90s and early 2000s is not upon us, so keep a smart reserve.
Regards,
Ethan Warrick
Editor
Wealth Authority
