“No problem can be solved from the same level of consciousness that created it” — Albert Einstein
Stock market action for the month of December has been uncharacteristically negative for this time of year — so far, the worst performance since 1931 during the Great Depression.
Things were so bad that on the eve of Santa’s scheduled arrival stocks ended up in the losing column. The losses, some 653 points to the downside, turned out to make it the worst pre-holiday session in the history of the DJIA.
But on the day after Christmas the market witnessed a remarkable about-face with stocks charging back a total of 1,086 points and another record — the best single-day performance in U.S. stock market history.
These historic bookends made for a fitting conclusion to a year that provided plenty of excitement and economic suspense throughout the entirety of the year 2018.
So, with the lump of coal investors got x-mas eve turned to dust by the hooves of a resurgent bull stampede, it might be a good time to reflect on some of the more significant news and events that occurred during the last twelve months.
You may recall how stocks picked-up right where they left off last year with much of January spent setting new highs and recording the best start to a new year since 1997.
Inflation remained relatively low due in large part to a $25 per barrel decline in the price of crude oil and a near commensurate amount of price relief at the gas pumps.
Unemployment held relatively steady averaging just under 4% with job numbers exceeding forecasts throughout much of the year.
Meanwhile, the Federal Reserve continued to push interest rates higher despite a growing number of calls for bankers to consider slowing or pausing their rate normalization program.
And, on Wednesday, August 22nd, we officially entered into the longest running bull market of the modern era at 9½ years.
Then another record fell on October 3rd as the Dow Jones Industrial Average rallied to its highest price level in history, closing at 26,828.39.
Also, during the month of October, the Conference Board index of consumer confidence rose to an 18-year high indicating a high-degree of optimism by Americans — based on a variety of financial activities; most notably savings and spending trends.
Taken together, these headlines might seem to indicate we’re in one of the strongest and most prosperous economic periods seen in decades, but is that really the case?
Let’s dig a little deeper and see what we can find.
This year, like the last and many before it, the government proved once again completely incapable of turning away from the easy money window over at the FED and proceeded to bury the American taxpayer under another $1.37 trillion of debt.
That means government, in all its infinite wisdom, grew the deficit at a rate of at least 6.6 percent, according to the latest Treasury Department figures — that’s more than twice as fast as GDP growth and at least three times the rate of inflation.
But the debt meme doesn’t end there.
Reports put US household debt now at approximately $13.3 trillion — a figure exceeding the 2008 peak. That’s due in large part to the demand in mortgage lending, which is currently hovering near its decade-ago level of $9 trillion-plus.
Student loans also remain in high demand, having surged from $611 billion in 2008 to nearly $1.6 trillion today.
Auto loans, at almost $1.5 trillion, have also exceeded their 2008 totals with an ever increasing percentage of these loans being relegated to junk status, according to industry analyst Michael Alkin.
Additionally, the U.S. corporate debt market has grown to levels never seen before — meaning corporate America has been borrowing money to boost stock prices via share buybacks, making dividend payments, and financing mergers & acquisitions — instead of investing in future growth and expansion, something typical of the past.
But what do the experts have to say about all this?
…And the Really Bad
The historic and ever-growing mountain of debt may be part of the reason Goldman Sachs earlier this year described their fiscal outlook for the US as “not good,” and went on to say our current path could threaten the economic security of the country when the next recession occurs.
Striking a very similar tone Ray Dalio, founder of Bridgewater Associates, the largest hedge fund on the planet, said recently he believes, “We will have low returns going forward for a long time.”
In April the International Monetary Fund (IMF) warned, “That rising debt levels are a growing risk around the world” and that not enough was being done to improve debt restructuring and enact measures for responsible lending and borrowing.
Then, in September, the Bank of International Settlements joined the chorus by cautioning the global economy risked a “relapse” of the decade earlier crisis explaining there was little “medicine” left to treat the patient a second time.
The medicine they’re referring to is of course more borrowing, and more debt.
Back to the Future
As I’ve mentioned previously, debt, when used wisely, can be a powerful financial tool. But, when instead used irresponsibly and to excess, the results can be disastrous.
For individuals, overborrowing can lead to personal bankruptcy, loss of reputation, and financial ruin. But when a country takes on too much debt it can have a myriad of consequences — impacting everything from the value of its currency to interest rates, even effecting its ability to deliver on basic services.
Debt truly is a double-edged sword.
So, did you know as we together enter into the new year, total global debt is now approaching 250 trillion dollars?
It’s a truly astronomical number.
But it all begins to make sense when you consider how lower interest rates tend to encourage more borrowing across the board. Not to mention economic growth so far under Trump has been about the same as it was under Obama — In other words, there is no growth miracle, just more of the status quo.
So, why do we have any growth at all?
I think Jeffrey Gundlach, known as the new “Bond King,” said it best: “Nominal GDP growth over the past five years would have been negative if U.S. public debt had not increased.”
Most understand when given the choice between doing what’s right or putting in place some kind of a quick fix, politicians tend to take the easy way out. That’s called “political expediency”, and it’s defined as the quality of doing what’s convenient despite possibly being improper or immoral.
So, if growth in the U.S. has become unsustainable without constantly adding to the debt, how sustainable is the increase in debt? Whenever debt grows faster than income it increases the likelihood of default through inflation, restructuring or nonpayment.
Meaning the outcome is no longer in doubt, only the timing.
Going forward it’s important for all of us to remember, especially retirees, that markets don’t keep making record highs forever, and we should never forget how much of the so-called economic recovery is related to the accumulation of more and more debt versus real growth.
The stimulus intended by lowering interest rates, quantitative easing, and other unconventional monetary policies have failed to yield clear results and the effectiveness of this great economic experiment will likely be the subject of debate for decades to come.
Moreover, while the tax cuts may have provided a short-term economic boost, the deficits they create could haunt us for a long time to come.
Lately, I’m surprised by the number of people I talk to who seem to regard current economic conditions as little more than a bump in the road, suggesting that, “when things get back to normal,” we won’t have this to worry about anymore.
But what if things don’t get back to normal?
What if, instead, we’re already living the “new normal,” and this is as good as it gets for the next decade or two, or perhaps longer?
Is it out of the question to consider the possibility the world really has changed, and we simply can’t go back to a place that no longer exists?
With that in mind, would anyone be surprised to wake up one day to find our economy stuck deep in the mud — mired in a quandary of little or no growth, where nominal gains one year are offset by a few points to the downside the next?
Objectively speaking, that’s just the sort of thing our massive debts portend, and it’s all happened before. In fact, it’s happening right now throughout Europe as well as in Japan — until recently the second largest economy in the world.
Since no one can rule out the same kind of thing happening here, it makes a lot of sense to consider how your current retirement plan would perform in that kind of economic environment.
The April IMF Statement went on to say, ”…now is the time for countries to get their houses in order to prevent and prepare for future financial crises.”
In my opinion that’s good advice, and not just for governments and policy makers — it makes sense for individuals and retirees to consider doing the very same thing for themselves.
With that, I wish you all the best for a safe, healthy, and prosperous 2019.