Sunday, October 30, 2016

The Gathering of the Perfect Storm

Rates are spiking up -- not only in the US but globally as well.  This has to be caused by either inflation fears, credit quality fears or both.  Meanwhile, economic weakness seems to be shutting down economic growth globally.  The world is entering a period of the perfect economic storm.

Even with the recent GDP growth estimates for the third quarter in the US, the overall US growth rate is sluggish and likely weakening.  Other data suggests the US economy may be slipping into recession that the data will confirm in 2017.  The likelihood of further economic strangulation from the political process suggest growth may be forced by the politicians further into negative territory.

The Fed is a growing joke.  As the economy slips and rates rise, the Fed is set to raise repo rates and the funds rate -- two rates that are increasingly irrelevant to the economy.  But, the Fed has to act soon, as other rates are skyrocketing, or the Fed itself will be exposed as irrelevant.  It will be interesting to see the Fed "raise rates" in the face of an economy entering a recession.  I suppose Janet Yellen will, later, explain this away by things she didn't anticipate.  She will have to come up with some rationale.

The growing calls for infrastructure spending bump against the reality of massive debt already plaguing every major economy in the world.  There is simply no room for more spending in any country's budget these days.  The massive transfer payments, subsidies, and rent-seeking programs built into western nations' budgets will prevent any money being available for even the most basic needs of government.  The idea of increasing infrastructure spending is laughable.

Meanwhile, politicians call for higher taxes on the rich.  This is a pipe-dream.  Under current law, Warren Buffett doesn't need to file a tax return or pay any taxes at all, regardless of what the rates are.  Rich people can adjust their taxable income at will.  Last year Buffett paid $ 1.6 million in taxes.  That suggests an income of $ 3 million.  That's a joke for someone worth $ 65 billion.

"Taxing the rich" will further remove incentives for entrepreneurs to increase employment and business formation.  This just further weakens an already weak economic environment.

Stocks have bumbled along as earnings continue to wither.  But, the stock market cannot continue to produce if the underlying economies are weakening.

Watch out!

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