The Crash Is Coming

More and more market observers voice the opinion that caution should be exercised in the present financial environment, and this is due to various factors. Last week`s bond sell-off in the US made investors aware of the narrowing gap between yields from stocks and yields from bonds. With ten-year Treasury notes producing a yield of 3.27% the yield curve steepened, but this may be only temporary as the Fed is apparently intent on continuing its programme of normalizing interest rates and trimming its balance.

US wage growth is picking up slightly with unemployment officially at a low not seen for decades, namely, 3.7%.This would presage a rise in inflation, which on the one hand would favor equities and dampen enthusiasm for bonds but on the other hand would probably push the Fed to hasten the pace of interest rate rises to try and stymie the threat arising from higher prices.

A new factor in the equation is the ongoing trade war with China that has so far resulted in the imposition of tariffs that will have an impact on the prices of commodities imported into the US from China. Consumers will end up paying for the tariffs, which will be passed on by importers.

Another factor that is gaining weight continually is the burden of debt both on the part of government and consumers. In addition there is the great increase in corporate debt due to the low cost of borrowing to finance stock buyback programmes. Rising interest rates will have negative effects on all three: government, corporations and consumers.

US national debt has increased to over US $ 21.5 trillion while Congress has shown no propensity to rein in spending. Corporate debt is at all-time highs while consumer debt is at levels that do not leave much room for further leveraging. The continuation of sustainable growth in the US is in doubt.

The cost of oil has recently increased, and that means inflation for the economy in addition to the inflation resulting from tariffs. Given all these factors the optimism of investors seems misplaced, and the high prices for equities that stocks are still fetching are a bit far-fetched. The old adage of “buy low, sell high” can be put to advantage at the present time by selling high-priced equities, which is what many company executives have been dong recently. They apparently know something that we do not. Cash will be king again as soon as markets head southward. That could be very soon.

Walter Snyder

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