Thursday, November 30, 2017

What Happens If There Is a Recession?

As I write this the stock market is up about one percent. That's all well and good and supposed to be caused by the prospects of a rich guy's tax cut. Except, the market is already at a pretty dizzy height and well above historic averages. Looking at the S&P 500,
  • P/E ratio 25.5 - the price of stocks divided by how much money they make. A healthy economy sees a ratio around 15. Stocks are significantly overpriced. The only times in the past 140 years it was this high was 2001 (the dotcom bubble) and 2008 (the subprime mortgage bubble). Both popped into deep recessions.
  • Earnings Yield 3.9% - This is pathetically low and only tolerated by investors because interest rates have been rock bottom. But rates are rising making business investments look increasingly risky.
  • Corporate Debt - Is massive, especially in the highly leveraged retail sector. Businesses don't have the earnings to pay off their debts so as interest rates rise some really big businesses are staring at bankruptcy (Sears, I'm looking at you).
We are near the top of the Obama economic boom. Looking ahead, Republicans will pass their tax cuts and a few months later the nation will stumble into a, perhaps deep, recession. A recession that, given the Kansas experiment, the Trump tax cuts will make worse.

People will lose their jobs. Republicans will react by cutting government spending, making the human suffering worse. Voters who have tolerated Trump's boorish behavior because at least he made the trains run on time will turn on Dear Leader. Trump and Steve Bannon will blame everything on immigrants, upping the hate rhetoric to try and hold their base. Facing a mid-term electoral debacle, Trump will play the only card left to him, starting a nuclear war with North Korea.
While the rich move their tax savings off shore.

1 comment:

MikeS said...

Wow, cheerful outlook. Hard to argue, though.