For months I have been surprised to see that the US stock market keeps breaking records. Yes, I get it of course, corporations and investors believe the Trump presidency means lower taxes and more stimulus for businesses. However, by now any rational person should realize that most of this will be pure wishful thinking.
In my opinion the USA is headed for disaster, but most market participants don’t want to see it. Trump behaves like he is crazy, just looking at his tweets it is clear that he does not belong in the White House. Not only does he not seem to grasp what it means to be president, but with his erratic behavior and thin skin he is a danger to the world. Most of his voters didn’t want to see it before the election, which was a surprise to me. But it seems most still don’t want to see it, and that is why I believe the US economy -and with that the stock market- is headed for disaster. When will that happen? I think fairly soon. I see so many red flags that I wanted to write a quick blog post about it.
This week the world faces some important economic and political events that may lead to a perfect storm. First of all the Brexit vote. If the UK indeed decides to leave the EU this will be a major setback and could lead to a shockwave on financial markets. On Wednesday the Dutch will have their elections. Normally not an important event (at least not for the rest of the world), but given that the right-wing populist party of Geert Wilders has a chance to win, this could lead to a new shockwave. Next to that the FED will make a decision on the interest rates. Trump wants to see economic growth, so he wants to keep the rates low, but it seems likely that the FED will start increasing its rates this week. That’s bad news for business, especially because this will be the beginning of a series of rate increases.
But most important, and something you don’t read much about in the media (yet), is that Wednesday night the US will reach its debt ceiling. That means that the country is not able to borrow more money to finance its deficit. With $20 trillion (!) in debts the country is in unsustainable territory already, but now things are getting even worse. In the past debt ceilings were always increased, although sometimes at the last moment and after a serious stand-off. However, now that Trump is in power there is no Democrat who would vote for an increase in the debt ceiling. So the world may realize on Thursday morning that the good times might suddenly be over.
The US has enough money to keep paying its bills until early this summer (mainly interest payments on debt), but it will have cut a lot of other costs do so. That in itself is problematic already, but when that happens Trump might finally realize that his plans for tax cuts and additional infrastructure and defense expenses simply won’t work. Or if he still doesn’t get it, it is likely that at least the market will understand that fiscal stimulus measures are unlikely to happen.
And what will happen the moment the US really runs out of cash is anybody’s guess. I would actually not be surprised if Trump would choose to go for a default its obligations and then blame it on the Democrats (he indicated this once during his election campaign!). I believe this would pave the way for a dictatorship: the economy would completely fall apart, people would not only lose their social security but also their pensions, and riots would be very likely. Trump would then re-emerge as the strong man who will solve it, by blaming anybody but himself for the mess.
Summarizing, from an economic point of view I don’t believe the stock market rally can continue for much longer. To me it seems a huge stock market crash is inevitable. It’s not a question if it will happen, but only when it will happen. The moment the first investors start heading for the exits the whole house of cards may collapse. If you are an investor you should consider hedging your bets by going into gold, silver and possibly Bitcoin. Don’t wait too long.
Thanks for writing Marc. Discovered your blog recently and I
appreciate your posts (this is another good one!). Your life story and passions inspire me because of my similar aspirations.
I’m a 30 y/o Dutchman, Majored in Asian Business, lived in China, Indonesia, and Singapore for three years in the past five, have been a talented semi-professional bicycle racer, and love mental, physical, and insightful challenges just like yourself.