THE CRASH OF 2018 4

BY: HASSAN FARAZIAN

                                        Everybody knows that the boat is leaking
                                   Everybody knows that the captain lied

                                                                    Leonard Cohen, Everybody Knows

“How did you go bankrupt?” 
Two ways. Gradually, then Suddenly.”

Ernest Hemingway, The Sun Also Rises

SUMMARY: Let’s hope this economic analysis will be proven wrong since it is very counterintuitive in the ongoing rising stock market euphoria – despite the recent stock market turmoil. But the current sociopolitical tensions in all countries with its spillover effect into the global interwoven village are probably a significant reflection of the current — degrading economic environment — that has never recovered from the 2007-2008 financial crises. In spite of the misleading growth factor cited as the favorite economic indicator by the politicians, economist, and financial observers, it has done nothing for the majority of the people. As Warren Buffet has so accurately noted: “The tsunami of wealth didn’t trickle down. It surged upward” — thus 0.1 percent owns 90 percent of the wealth adding further to an unhealthy economic and democratic basis by lending more credence to the notion of the golden rule i. e.He Who Holds the Gold makes the Rules.  There is also the lasting dilemma that the Western economies and their policymakers are still grappling and continue to be overwhelmed with: decades’ old structural and infrastructural economic challenges with ultimately a political crisis overtone that is kicked down the road.  Questions such as growing elderly population, productivity, the broken pension funds and insufficient trained or educated labor force – to name a few – have not received serious consideration. A snapshot of the United States and European economies along with other relevant global influencing – blocs and factors –  presents an otherwise rosy picture of what is on the horizon. Therefore, their general scrutiny weighing upon the world economy should provide better proof of its direction.

The economic mien is, therefore, pointing toward a new severe recession since the last financial crisis – making it look like a dress rehearsal – despite the existence of an overall general denial and an atmosphere of self-deception. There will be many casualties in both the Private and Public sectors as Banks, Finacial institutions, Universities, Colleges, and yes, even countries and their institutions will struggle to stay afloat. Remember the inconceivable implosion of Bear Stearns and Lehman Brothers? What about the General Electric (GE) and its current resemblance to them. How about Iceland and Ireland sinking then? The UK could very well be the one in the next economic bedlam and crisis. Nothing will be untouchable in the economic catastrophe that will be asking for its long due bill of overextended credit travesty.   But like all-compelling sociopolitical and economic events, this emerging crisis has to be analyzed at the two underlining levels of (i) fundamental reasons and then (ii) the triggering events unleashing it. This difference between the primary and triggering events causes —  is a crucial aspect of any social science study that can give credence and clarity to the viability of its conclusion.

 

 

The Fundamental Economic Crisis And Its Brewing Components: The US,

Europe And the Global Village — Numbers Don’t Pencil Out

 

The still valid expression that when the US sneeze’s the rest of the world catches a cold should make it the starting point in examining the linked Western economies and the world financial environment that breath and feed into each other. Thus, the examination of the still World’s largest economy can set the stage for an analysis of a global perspective. Then an overview of the world economies can add to the validation of the general global economic climate.

THE UNITED STATES

Examination of various sectors from A-Z with significant impact upon the American economy and consequently the world should be a pertinent starting point in evaluating the United States, Western and the rest of the critical economic polls.

   THE  AUTO  INDUSTRY

The auto industry is in an accelerating severe trouble. Since April 2017, the sales of all Major American and foreign companies have plummeted between 4 to 7 percent and continuing to decline. In fact, during the first six months of 2017, auto sales fell below the 2014 levels, and the verdict points to the — first yearly car sales decline since the 2007-2008 recessions. The reason is due to several factors. First, after many years of gradual but steady car sales that followed the recession, the market has become saturated, and the Americans have bought enough cars that there is no more significant demand. Second, the vehicles have become unaffordable because of both the high price tags that are Off-Price for many and the rising interest rate. So the dealerships and manufacturers are struggling with critical and growing inventories. Finally, there is the reality of a tightening credit market. The harsh truth swept under the carpet is that both the subprime and what in the car industry jargon is referred to as the “deep subprime” have reached the same level of delinquencies as in 2007- 2008 crisis and probably is surpassing it. Both the lenders and consumers have become complicit once again in a fraud-related behavior reminiscent of the past shady criminal misconducts. The biggest auto lender Santander is under serious investigation in at least 30 States. All this shall weigh in with severe consequences on both the local as well as the overall American economy. For a short while, the hurricane in Houston, TX, Florida, US Virgin Island and Puerto Rico gave the industry a small breathing room to compensate for the ongoing severe crisis. But the market is crowded, and it is indeed a buyer’s market. But there are not enough significant amount of buyers that can help turn around the industry that is glutted with vehicles, overburdening defaults and high/rising interest rates.

                 

The BOND MARKET

 

The Bond market, a traditionally sound investment has started to show definite historical signs and indication of a recession ahead despite official governmental unemployment statistic and certain economist’s optimism about the stock market growth. The difference between Treasury paper short and long-term Yield has been a reliable barometer in foreseeing a recession in the making. Whereas the short-term debt Yields a lower rate, the long-term one due to locking of funds translates into a higher Yield for the Bondholder.

Thus it is very troubling that the difference between the — 2 and 10 year Treasury Bond — fell to 51 Basis Point on December 2017 from 135 Basis Point a year earlier – on December 2016. This is even more disconcerting given the fact that the last time this occurred was in October 2007 and hence worrying about the prospect of an economic outlook. But responding to the last question regarding the shape of the curve in her final press conference on December 13, 2017, the former Chairman of Federal Reserve Janet Yellen had shrugged it off as a technical deviation adding:

“I think there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed,”

Déjà vu? Alan Greenspan and Ben Bernanke, her predecessors, had both made the same mistake respectively in 1998 and 2006. But as always other experts such as Mohamed El-Erian too, attribute this to other factors and believe the economy is still sound and has room to grow.

The Bond rate will be reflecting further worsening economic sentiment on the horizon when the short-term bond market rate passes the long-term Bond rate, and the curve becomes negative. Then no matter what kind of explanation spin is forwarded, it cannot be shrugged off as a market anomaly.

Further, in anticipation of worsening time, Morgan Stanley Wealth Management has just completely cut its High Yield Bond and exited the Junk Bond and Mike Wilson, the Company’s CIO has stated:

“We recently took our remaining high yield positions to zero as we prepare for deterioration in lower-quality earnings in the U.S. led by lower operating margins.” (My Emphasize)

All around, therefore, the Bond market does not write down anything right on the horizon for – the economy – even though there are those who continue to pay no heed with an otherwise different interpretation of it; and leaving little incentive for the banks to lend the desperately needed money for investment in the economy.

 THE CLIMATE FACTOR

This is the single cruelest reality that has and shall continue to challenge the US and world economy in its entirety by interrupting any policy to remedy the global economic crisis. It would not be an exaggeration to estimate the damage for the recent 2017-2018: Hurricane in Florida (amongst other Florida losses being the real estate and tourism); Puerto Rico, with its still melted down economy; US Virgin Islands; Houston, Texas flooding;; the fire in Northern and Southern California along with the ensuing rain and mudslide in Montecito, CA to eventually have cost — one Trillion dollar. For those skeptics, the new budget just passed has included an almost $90 billion in disaster relief for the Hurricane, Wildfires, and mudslides on top of what has already been spent.

 Apart from the human tragedy and the loss of life, billions in wealth have vanished overnight, and the entire immediate as well as adjacent economies are severely affected and hindered by feeling its fallout. This has happened due to loss of economic interaction followed by the migration from the areas and States that have gravely been touched to other places that are ultimately burdened by the resources they have to allocate in supporting them. As an example, it is estimated that approximately Three Hundred thousand Puerto Ricans have left the island in seeking refuge elsewhere in the United States. Thus while Puerto Rico is being depleted of its Human skill resources, other cities, States and the Federal government will be overwhelmed by accommodating the new refugees. This is a scenario that happened with the Katrina Hurricane and Louisiana. But a continuous hit by Mother Nature that is now the “new normal” can — and will continue to take its toll on the economy and the people without any mercy or distinction –even for those who have admitted the reality of the climatic change besieging the world.

In Houston’s case, for example, Fannie Mae, Freddie Mac and the Federal Housing Administration that back the majority of mortgages had offered forbearance to borrowers that in some cases was extended to a year. Thus the borrowers were not obligated to make any monthly payments while exempted from any penalty fees. But, interest would have accrued which only means the can was just kicked down the road with enormous problems for Fannie Mae – just like 2008. However, the economic situation there has not stabilized to this date, and the homeowners and the economy continue to struggle in the aftermath of the hurricane Harvey.

 Sadly, neither the Federal government nor the States will be able to provide any meaningful relief for more future calamities that are certain to batter the country – in the long run. This will gradually translate into more disaster-stricken areas receiving much less anticipated and needed funds necessary to recover. The money and the resources are just not there to help the victims and eventually revamp the economy. The case of Puerto Rico too in dire hard need of help that has not materialized should be another somber awakening for future areas of the country when – and Not IF – they are hit with a natural disaster calamity. On January 31, 2018, Federal Emergency Management Agency (FEMA) officially stopped or as it had announced “officially shut off” all aid to Puerto Rico even though 20 percent of the Island lacks water and about a third has no electricity and the estimated fatalities are much more than the official count of only 64. The money and resources are stretched to the limit and Americans need to grasp this harsh reality that the government is broke and can’t print more money. The States of California and Florida, for example, that are absolutely certain to — again —  become victims of catastrophic Wildfire and Hurricane climate disaster respectively should watch out as with the magnitude and certainty of the looming climate disaster facing them. They could be the next Puerto Rico in the making — waiting for substantially massive aid that shall not materialize during the succeeding climate tragedy. The next major disastrous climate incident or several acute ones in the US following each other just — like the 2017 episode, will, therefore, be a devastating – one, two punch – for the American economy.

 

THE DEBT

 

There are two significant factors that have been the reasons for the downfall of all Empires:  the national Debt with its accumulating interest; and, massive unjustifiable military spending that has undermined their economies. The United States’ economy is undoubtedly suffering from both symptoms. As for debt, it covers all sectors without prejudice – Public and Private.

As a picture is worth a thousand words, so do the debt numbers paint an uncomfortable reality.

The Private Debt: While the fixation by politicians and economist alike has been on the Public debt, it is noteworthy that the current Total US Household debt which includes: Mortgage; Home equity line of credit; Student loan; Credit Card, and of course Auto loans have surpassed 13 Trillion dollars. The debt to GDP ratio in the US is now 88 percent and exceeding that of France, Germany, Italy, and Spain with the worst undisciplined country being the UK.

 

The Corporate Debt:

The Corporations have not been immune to the debt accumulation in the post-recession crisis of 2007-2008.The main culprit has been the meager, almost zero interest rate. Hence, the Corporations have issued investment grade Bonds, i.e., companies with good credit to a ravenous public that has relied on the corporation’s good faith and perhaps the certainty that they have the US government in their pocket to bail them out. Thus the Corporate Bonds have had no problem finding buyers, despite the fact that their yield has been at the lowest level in 60 years.

The problem, of course, is the Ratio of debt to earnings. Translation – if it needs one: The Corporations have taken on more debt than they can earn to pay back and are highly leveraged. The Gross Leverage Ratio statistic is now the highest since 2002 – and rising. The corporate debt accumulated since 2009 hovers now around 10 Trillion dollars. To put this into perspective, it should be noted that this is 60 percent higher than the amount borrowed by the corporations in the eight-year preceding the 2008-2009 financial collapse. As an example, the revered Netflix has accumulated over 20 Billion dollars plus in debt. Although the three sectors of Utilities, Energy and Material Companies are among the highest in debt to earnings ratio, the rest are not far behind in facing this problem.

The new tax law favoring Corporations can perhaps remedy – or at least give the impression that it can in the very short run help this problem. However, it would only be a band-aid, and it will not in any way support the underlying debt/earnings ratio reality. Particularly with the certainty of the rising interest rates that shall affect the Corporate Bond market when the Corporation payback day will face an even a harsher task to manage.

The Public Debt:

Inevitably, the subject comes up in every political debate. But not much beyond rhetoric is accomplished and although the consensus always agrees that it should be addressed promptly – it continues to grow like a monster with a life of its own. The numbers speak for themselves: By the end of the current Fiscal Year 2018, the total US Federal debt is estimated to be over 21 Trillion dollars. However, for the same Fiscal Year, the entire US Government debt that includes Federal, State, and Local governments is expected to surpass the 24 Trillion dollar line.

 Economics 101 is evident in the fact that this weighs heavily and adversely on the economic growth, interest rate, inflation and even Hyper-Inflation. The case of Japan, Greece and other countries still struggling because of their past fiscally irresponsible policies are the living examples of the consequences that shall follow the United States if it is not dealt with fast and in a draconian way. In short the sum of the Public, Private and Corporate debt in the US does not inspire a positive economic outlook.

                   

  EDUCATION

American Higher education with its contribution to the economy and employment has cornered itself into a very precarious situation. They have not kept up with either the changing times regarding both educational evolution or the economic realities; and still less the principle of tutoring to the need and education of their students which should be the “raison d’être” of Universities’ existence. The question of American Universities and the direction they have been taking was raised in an article by The Economist, Schumpeter, Declining by Degree: Will America’s universities go the way of its car companies?  September 2, 2010, and thus noting:

Two right-wing think-tanks, the American Enterprise Institute (AEI) and the Goldwater Institute, have both produced damning reports about America’s university system. Two left-wing academics, Andrew Hacker and Claudia Dreifus, have published an even more damning book: “Higher Education? How Colleges are Wasting Our Money and Failing Our Kids and What We Can Do About It”. And US News & World Report, a centrist magazine, says in its annual survey of American colleges that: “If colleges were businesses, they would be ripe for hostile takeovers, complete with serious cost-cutting and painful reorganizations.”

College fees have for decades risen faster than Americans’ ability to pay them. Median household income has grown by a factor of 6.5 in the past 40 years, but the cost of attending a state college has increased by a factor of 15 for in-state students and 24 for out-of-state students. The cost of attending a private college has increased by a factor of more than 13 (a year in the Ivy League will set you back $38,000, excluding bed and board). Academic inflation makes medical inflation look modest by comparison.

As costs soar, diligence is tumbling. In 1961 full-time students in four-year colleges spent 24 hours a week studying; that has fallen to 14, estimates the AEI. Drop-out and deferment rates are also hair-curling: only 40% of students graduate in four years.

The most plausible explanation is that professors are not particularly interested in students’ welfare. Promotion and tenure depend on published research, not good teaching. Professors strike an implicit bargain with their students: we will give you light workloads and inflated grades so long as you leave us alone to do our research. Mr Hacker and Ms Dreifus point out that senior professors in Ivy League universities now get sabbaticals every third year rather than every seventh. This year 20 of Harvard’s 48 history professors will be on leave. (My Emphasize)

 

Added to the dilemma of traditional schools has been the growing trend of online education. Its cost compared to the university schooling is like day and night. Hence innovative schooling business models have struck the chord with many young people, their parents and even education experts who been tired and highly skeptical of the “old school” methods. One such example is MissionU founded by a young entrepreneur Adam Braun on the principle that it last only one year and costs nothing to partake. Then if candidates have landed a job that would pay $50.000 or more, they must pay back 15 percent of their income for three years. This kind of approach will continue to haunt universities that resemble dinosaurs and are disconnected from the realities of the working world; sidetracked from their principal objectives; and concentrated on the glitter of research, brand name professors and of course, needless to say, sports programs.

In the academic year of 2010-2011, the University of Nebraska in Lincoln ( NU) scraped its Industrial Engineering program – overnight — due to lack of student participation and funds that did no longer made any financial sense. As the cost of higher education continues to be matched only by the Health sector, it is yet another weighing factor on the daily economic life of many Americans who are crushed under it and the student loans that now exceeds 1 Trillion dollars. There will be a lot more trimming of various Departments, schools, and indeed small colleges or even, yes, Universities either disappearing or merely merging with others — just like the example of NU and the vanishing of its Industrial Engineering school. Thus many of the higher education employees will also be joining the ranks of the unemployed.

       

 INFLATION AND THE INTEREST RATES

These are the two most obvious thorny interrelated economic factors that are affecting the current market jitters. However, inflation has been coming for some time but ignored and swept under the carpet. While the core inflation index — until now– has been deemed reasonable according to the Federal Reserve’s goal of 2%, it has most definitely surpassed its watched target. The three most essential items of Food, Health Care, and Housing combined would undoubtedly put the current inflation level well over the 2% level – and rising. As for the continuing rise in Health Care, Warren Buffet’s recent and most favorite expression used over the years is fitting when he had recently observed: “The ballooning costs of healthcare act as a hungry tapeworm on the American economy” that has dragged the economy. The Food and Housing speaks for itself along with the energy cost  ( have you filled up your car lately?)

There is, of course, the lower maintained US dollar and the rising wages that will be adding fuel to the inflationary pressures. The weaker dollar makes the imported goods more expensive, and the increased wages also fuels both the Demand-pull and Cost-push inflationary pressures. Economists have agreed as proven by experience that although in the short-run there is an inverse relationship between unemployment and inflation, in the long run, this leads to Stagflation which would be a combination of both high unemployment and inflation besieging the economy. Thus, as it is being witnessed, the interest rate hike has only just begun and shall continue henceforth as a direct consequence of the rising inflation that is now inevitable.

It goes without saying that the rising inflation and consequently interest rates will affect and cut like a knife through all sectors of the economy such as the stock market that is currently witnessing the turmoil. But the real estate and the pension funds will also be in the direct hit of this next inevitable adverse economic factor on the horizon. Although the effect of interest rates on the pension funds or any other financial instruments is a very complex task to foretell subject also to other factors, it is certain that the hike in interest rates could be instrumental in causing it noticeable fluctuation. Adding to further instability and uncertainties in the market and the economy. But with regards to the real estate market, during the coming months and by the end of 2018, the 30Yr Fixed Mortgage rate will be close to 7% and given the deteriorating nature of the economy, making it harder for borrowers to qualify. This would be the repeat of the movie with the same ghastly ending, even worse than the last recession. The sellers will find out that there are no buyers for the speculative and astronomically high prices the real estate market has become and that there is a limit to the number of millionaires or very high earning professionals. The rise in the interest rates would, of course, be the awakening trigger in the real estate crash and of course, an overall bankruptcy that will begin through a snowball effect of credit card debt, mortgage payments ( as variable rates will also rise) and all other kinds of debt Private, Public or otherwise.

 

    

 The UNEMPLOYMENT And The UNDERGROUND ECONOMY

The Quietus of the traditional Brick and Mortar slowly but surely will be adding to the unemployment lines in the looming economic crash. The effect and closures of thousands of stores by Sears, Macy’s, J C Penny and many other stores along with shopping Malls will indeed and tragically manifest itself during this year. The glee of the promised benefits of the Tax cut has already been forgotten by those who have been shown the exit door.

 In the aftermath of the new tax cut, Walmart announced a one thousand dollar bonus for some employees. However, brutally and without notice, it closed 63 Sam’s Club it owns leaving 11000 workers out of work. At the same time, it fired thousands of its co-managers by replacing them with the much cheaper laborer. If it raised its minimum wage with fanfare to $11, it was because of the very high turnover rate that was costing the company money. The upshot and multiplier effect for both the unskilled workers and White collar employees is a quite Tsunami that has not yet been grasped by the majority of the economist or the business world in general as many more layoffs are on the way. Add to the above store closures, the disappearance of Bath Bed and Beyond as well as Costco – to follow.

Just one consequence of this along with other harmful economic factors would be the increase in the underground economy. It will rise more as a mean of tackling the financial hardship rather than evading taxes or regulations. Briefly, the economy will stop creating jobs and instead the unemployment will rise by between 1 to possibly 2 percent by the end of 2018 – the First Quarter of next year.

 

 

 

 

         A DECADE AND HALF OF The WAR- AND COUNTING

There is no instance of a country having benefited from prolonged warfare.

Sun Tzu,

The Art of War, Chapter II, WAGING WAR

 

The Spanish-American War (April 21, 1898 – August 13, 1898[1]) officially lasted just under four weeks. However, the last checks for that war’s veterans were sent out as late as the early 1970s. At the time, the government imposed a 3% federal tax on long distance phone service that was in effect until it was repealed by the U.S. Senate Finance Committee on 28, June 2006. So while the American taxpayers shall continue to foot the bill for the Vietnam War Veterans for at least another three more decades, they are also burdened with America’s most protracted War since Post 9/11 in Afghanistan, Iraq, Pakistan, and the greater Middle-East. Started in 2003, despite former President Bush’s “Mission Accomplished” speech — it continues to bleed the United States of valuable resources needed at home. According to one study by the Eisenhower Research Project at Brown University’s Watson Institute for International Studies published on June 29, 2011, the cost was estimated to be 4 Trillion dollars. It is important to keep in mind that this is a very conservative estimate and it is difficult to account for the War’s real cost precisely. Hence, it could easily be closer to 6 Trillion — by now – with the added and continuing interest on the borrowed money since the date of the study along with conflicts that seemingly has no end in sight.

Thus as American military engagement continues to weigh on its economy as an added negative factor, neither the War itself nor its injured veterans and the social costs of the broken young families who have lost a breadwinner can be addressed with a magic wand or a band- aid. These are the tragic reality of unintended consequences of America’s most protracted conflicts that is another significant and invisible obstacle to the US economy. Seemingly ignored by the American politicians who are the puppets of the Military Industrial Complex by continuing to shout “Wolf” and pass more funds in the budget for the military expenditure to the detriment of the American economy. As they have just done by the passage of the two-year budget and of course once again raising the debt ceiling limit in the process.

But in the words of a real American Hero and not a Flag waving one General Dwight D. Eisenhower who had warned in his famous welfare speech about the danger of the Military Industrial Complex to the nation: “Every gun that is made, every warship launched, every rocket fired, signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. The world in Arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientist, the hopes of its children.” Hence the economy is deprived of ever more scarce resources. In economic term, the Production Possibility Curve does empathically confirm through the Guns vs Butter analysis that funds allocated to the military, deprives and hinders other developments that can benefit the economy. The United States Department of Veteran Affairs has failed miserably to live up to its motto “To care for him who shall have borne the battle and for his widow, and his orphan” not only because of mismanagement but to be fair, also,  because of being under staff by approximately sixty thousand manpower.

 

EUROPE

The Old Continent’s economies are also suffering from the same kind of malaise that is facing the American economy with the main culprit being the public and private debt. The country that would be hurt the most will be the UK where its ratio of House Hold debt to GDP is the highest and no longer has the support of the EEC as its safety net. No wonder the British government has turned a blind eye to an estimated 150 Billion dollars of money laundering through its financial institutions. But Portugal, Sapin, and Italy or even Greece despite its painful reforms are not out of the wood, yet, and none of them are immune to the adverse effects of the global economy (along with France and its heavy public debt that has been swept under the carpet )that shall become a demonstrated reality.  Although, generally speaking,  the European Infrastructural is in much better shape than the United States, the structural economic reforms in Europe still has a long way to go in achieving a meaningful level of modernity with the fast pace of the 21st Century that is being propelled even more every day into an ever-changing new technological innovation that affects the economy. In that respect, it will not be immune to the American “sneeze” of 2018 down the road, and just like the rest of the world, it would be paying a high price when the international crisis hits.

 

  

CONCLUSION

 

The sum of all the above elements does not leave a positive perspective for the American, European or the interconnected global economy. The music has stopped, and everything will be going south more than a “simple” correction that most analysts would like to pretend it is or will be when – and not if – it happens.

The Full critical effects of all fundamental economic factors such as the inflation, interest rates and debt or the ripple effect of the Mother Nature’s next and/or current recent disaster hits will manifest itself not at a speed of light but at a minimum of 6 months to a year and more depending on many components and influencing elements. The inflation factor has most definitively raced to the top with or without the Federal Reserve’s admittance. The new wage hikes and policy implementations will be only precipitating it more in the months – if not weeks ahead. The interest rate rise will, of course, follow suit just like a loyal shadow.

There is also the underfunded public employee pension fund that has been another critical concern for States and cities. In California, Governor Jerry Brown with strong progressive credentials is now in front of California Supreme Court attempting to reform the pension funds for new and — current employees. The resources are just not there as many pension funds such as Corporate, Cities, States or Federal in the neighborhood of 280 Trillion are merely plain broke and continue going deeper into the red territory. But California is not the only State, and many other cities and State pension funds will have to follow suit by accepting the hard choices that will become more urgent in the coming recession. However, at the national level, the new 2-year budget increases the spending caps by another $300 billion to the indifference of most lawmakers. All these are signs of future economic contraction and rubber burning brakes for the economy.

The GDP for the last Quarter of 2017 has shrunk and the First Quarter of this year should be watched very closely in the current economic uncertainties. However, the overall picture indicates a bloodbath in all financial sectors on the horizon in the United States with the stock market poised to lose at least between 40% to 60% percent. The overstretched stock valuation is ready for a somber wakeup call which includes the technology sector that has gone way over the map since the last Dot.com episode of 2000-2002 as many have forgotten and thus invested at any valuation resembling — the Dot.com hysterical level. The consequences will be colossal and as the foreigners own half of the stocks in the US – 40% the Chinese, serious global repercussions shall follow.

Economic hardship has also already hit severely all the oil-producing countries as it was and continues to be the case with Venezuela and the uprising in Iran that has been the cause of its recent riots. Even Saudi Arabia has not been immune to financial hardship. The supposed corruption surge by the Crown Prince Mohammed bin Salman(MBS) in Saudi Arabia raising a reported 100 Billion dollars by shaking the wealthy Saudi princes was more a short-term remedy for its severe budget deficit caused by the war in Yemen and falling oil prices than a move to implement socioeconomic reforms. In addition, all the emerging markets are also in denial of the growing economic hardship that is quietly heading toward them — notably through the Taper Tantrum reminiscent of 1997-98 occurrence. Thus all emerging markets — Latin America, Asian financial markets or even the badly managed Russian economy will be prune to severe punishment — as the rising interest rates in the US and a strong dollar will batter their economies.

The ripple effect will undoubtedly be global. The one element that has been overly exaggerated in a wishful thinking manner to save the day has been the American “overhauled” and oversold tax reform by the Trump administration that was passed without any serious debate or analysis. It has doped the economy in the short run, true, but without any meaningful long-term solution for economic growth and is sure to add further to the Colossal national budget deficit. The sugar high effect can only slow down a while longer the agony of the coming crisis for the American policymakers who are desperate for a solution and lost in serious policy confusion. The much celebrated Cooperate Tax break will only result in the classical stock buyback instead of re-investment to create jobs and thus will be further suffocating the economy and –accentuating the government budget deficit. In the words of Arthur Buchwald, the humorist who focused on political Satire, “Tax reform is taking the taxes off things that have been taxed in the past and putting taxes on things that haven’t been taxed before.” Regardless, another economic sector ready to be stricken again would be the real estate from the already empty Malls, Brick and Mortar, Office buildings and of course overpriced residential homes. The For Sale, Lease and Rent signs will be abundant. This is already happening as the ” Pending Home Sales” index for signed home sales contracts in the US fell 4.7% to 104.6 in January the lowest since October 2014, and the biggest monthly decline since 2010; and in Southern California, the hotbed of real estate market where the number of requested home appraisals have also fallen by 25 percent. The inevitable rise in the interest rates underlined earlier will also affect adversely an already mismanaged, to say the least, Fannie Mae. It had the incredible leverage of 912.4x at the end of September 2017 — up from the eye-opening 540.6x of 2016. Déjà Vu? Tighten your seatbelt for another serious real estate crash that will also affect — the rental properties. People or companies who are unable to sell their Homes will dump them on the rental market.  In short, there is an eerie feeling of 1929 worldwide depression in the air with the continuing underlying economic malaise facing the world that will be radically trimming all sectors of the economy. The wolves of Wall Street are all sitting in a circle and waiting for the first blink to start the ugly bloodbath.

 

 

TRIGGERING EVENT(S)

 

As the stock market opens tomorrow on Monday, February 12, 2018, and going forward – anything goes.  From the news of a bank collapsing halfway around the world in a country that no one may have heard either the name or still less the bank; to a further collapse of Bitcoin; or a sharp decline in General Electric (GE ) with its most underfunded pension plans among all cooperations. The fall of Apple, Facebook or Microsoft stock that is overvalued by at least 20 to 30 percent with another dot.com bubble on the horizon — well overdue and finally an economic analysis ( don’t blame this one ) all can be a triggering event in the psychology of a weak market. Thus, the lack of more investors entering into the unwarranted rise in the market will resemble the end of a — pyramid game —  that is unable to attract more funds for its Ponzi scheme.

Any excuses or scapegoat be it President Trump or a triggering event causing the massive market fall should be put into perspective that it has — not been the cause —  of decades of accumulating overspending and unwise decision makings in the work. Last but not least, it should be recalled that not only the previous financial crisis has never fully recovered from the recession,  but no real lessons were ever learned and instead, the party continued on the same path of extravaganza economic foolishness. As stated, the two critical factors of the national debt and continuing senseless and massive military spending by the United States the world’s largest economy will certainly be another short/long-term brake on the economy and a silent triggering factor for the crash that is looming and sorry, Jim Cramer’s charm or funny buttons and sounds won’t be stopping the economic free fall.

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[1] The U.S. declared war on Spain on April 25, 1898, but dated the beginning of the war retroactively to April 21

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4 thoughts on “THE CRASH OF 2018

  1. Reply John Barbie Feb 12,2018 6:50 am

    That was a great read! Thank you!

  2. Pingback: THE CRASH OF 2018 ← Farazian Focus via /r/economy | Chet Wang

  3. Reply Behzad Jul 27,2018 8:27 am

    Excellent sighting on improper economical behavioral of the elite leaders of the world. In my opinion, the superior military power and intelligence capability of the US will not allow the repeat of the crash of 2008 by all means. For that reason, a madman has been forged on the helm who will help make the outlook totally different as never been experienced before. The issue is unavoidable due to shortages of resources on the planet which sustainability of order is not possible and has to go through the radical changes for future generations.

  4. Reply LESLIE Nov 16,2018 8:32 pm

    IT’S-A GREAT ARTICLE.

    THANK YOU FOR YOUR BOLDNESS & FRANK COMMENTS.

    I DO AGREE WITH YOUR ARTICLE & EXPECT ANOTHER SEVERE US MARKET CORRECTION.

    CHEERS

    Leslie Chao

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