Are threats to our economic growth converging?

October 12, 2018 10:10 pm Published by 2 Comments

By now, everyone is aware of the broad stock market plunge yesterday. The S&P 500 fell nearly 40 points yesterday; the NASDAQ -4.0%. The S&P had reached its 6-month high only three weeks ago. MarketWatch Bummer! The DJIA lost 836 points as well. It wasn’t pretty. Even though markets somewhat recovered today, it’s still been a rough week by anyone’s standards. We are officially in market correction territory. The VIX index volatility rose past 20 to a 6-month high has surprisingly not affected the consumer spending index, which last month nearly hit its all-time high of 144.7 back in 2000, some encouraging news. CNBC

“Investors have long fretted that the trade war would crimp profits, and now a group of companies is warning just that is happening at the same time that rising yields make the cost of borrowing higher.” Bloomberg To top it off, Trump recently spewed unproven rhetoric that the Chinese government was attempting to interfere with US mid-term elections. Emerging market countries got inadvertently sucked in as well and values of debt and equity portfolios have been falling all year. This is likely an extension of his ongoing frustration with the Chinese trade war [which his administration started] which is already costing major US industries and farmers billions in profits. Ford just released a statement that the metals war cost it $1 billion in profit already this year and that its offering severance packages to 70,000 of its executives.

It has only just begun, apparently. A notable Chinese business expert recently warned that the tariff war with the US would last 20 years. Some are speculating that Chinese industries are less able to absorb the export losses-that China would blink before the US. Perhaps that question is more significant than economic projections and statistics. Will it be culture that will ultimately win out in the end? Chinese culture is 1000s of years old, whereas, the US has existed as a nation for less than 250 years. Globalization has created a large and exponentially growing middle-class in China and hundreds of billionaires and thousands of millionaires.

Among many economic factors stock analysts are combing over, the one causing a great dilemma is the inverse relationship between global bond market values and creeping interest rate yields. Capital is needed to sustain growth and, if the cost of capital is too high, then financing costs of operations becomes problematic for managers and cut into profits. The effect of weak fixed-income markets will have a repercussive impact through stock and other equity markets. Too many more rapid selloffs could hurt consumer confidence and new equity market investments. Which assets are the best investments in an environment of weak fixed-income and approaching equity weakness is a little-known scenario. Bloomberg I’m trying to find out and hope to report on it when I do.

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This post was written by Daniel Jones

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