Through what seems like unnatural effort, as bi-partisan agreements over the recent past decades have been increasingly unthinkable, the U.S. law-makers agreed to a budget that will keep the government open, boost defense spending, provide funds for non-defense programs and dramatically increase fiscal deficit while adding a cool Trillion plus dollars to the federal debt.
The seemingly good news of the Republicans and the Democrats coming to a Budget Agreement were a bit marred by the dramatic tumble in the American and Global Financial Markets during the week, highlighted by the two 1000* plus point drops (*in single days) in the Dow-Jones Average. It seems the bi-partisan budget did not go over well with the Markets.
There are other factors that are impacting market sentiment of course, but the over-spending budget contributed to the busts of the up-to-now ‘up-up-and-away’ stock markets.
It is a matter of record that the Republican Party talks a big line of fiscal responsibility and federal debt reduction when in opposition, especially in vociferous opposition to a Democrat President, but consistently and brazenly does the exact opposite when they are in power and are actually governing.
Well this time it is no different. In spite of controlling all three branches of government, the Republicans did not hesitate one bit to massively increase spending and balloon the deficit and the debt, without any economic weakness to justify it. So the financial markets reacted predictably by throwing an anxiety tantrum.
The anxiety stems from the fact that the last decade or so has already ballooned the American and Global debt to unprecedented heights through endless ‘Quantitative Easing’ and record low interest rates, justified from the financial crisis of 2008. So while the Central Banks are still in an effective ‘Easing’ mode, the additional unrestrained spending outlook brought on fears of a possible strongly resurgent inflationary surge, which in turn made for possible and faster interest rate hikes, which dropped bond prices, boosted yields, and sucked money out of equities, to bring on at least a temporary stock market bust.
While the Global and American economic fundamentals look good now and most economists don’t see any problems, the stock market looks possibly nine (9) months ahead, and from past experiences we know seemingly sound economies can turn sour very quickly. So at the very least the global stock markets are looking forward and worrying. And – there’s a lot to worry about.
Resurgent inflation is a worry. After all, the Trillions of dollars printed in the recent past, especially since the financial crisis of 2008, have to devalue currencies and make goods and services increasingly more expensive, sometime. The ever changing methodology of how governments calculate inflation kept the stated figures well within required range but the true effects of unlimited printing of currencies will show itself at the wrong time.
This phenomenon is already being experienced by the consumers as they pay higher prices in everything, from hard assets such as real estate, to daily consumption items like food, gasoline/energy, clothes, and service of every kind. And while governments bemoaned ‘too low inflation and moribund economic growth’ in these past years, to justify keeping interest rates unnaturally low and to boost the ‘wealth effect’ through inflated stock markets and real estate markets, everything else from high art to everyday items climbed steadily, at times to ridiculous levels. It has all resulted in the possibility of breakout inflation that is spooking the markets today when the spending by governments continues to be as profligate as it is currently.
In the meantime countervailing factors of international competition are being slowly neutralized by rising costs such as wages, raw goods and standardization in emerging countries so that the consumers of the wealthy countries are no longer feeling the sharp price advantages of cheap imports (they have long been priced in).
But even if inflation does not explode, the national and global debt certainly is, and has been.
This latest U.S. Trump-inspired Budget (more money for defense, border security [the ‘Wall’] and unpaid tax cuts along with ambitious and perhaps fanciful US$1.5 Trillion infrastructure schemes, and the tagged on bargaining chip costs of Democrat social programs wish lists) are all going to send the debt and therefore the cost of borrowing soaring.
Higher interest rates are the signal of the end of the endless equity bull markets of yester-years fueled by exceptionally low rates that had boosted bond markets to here-to-now unprecedented historic levels. Now the bond prices are falling in anticipation of rising interest rates and therefore yields are rising. The fear of inflation and high yields are driving money out of stocks into bonds, causing the current dramatic and long lost volatility to return. The volatility is certainly here to stay but whether this is a bear market - we will have to wait and see.
Can it get much worse? Oh yes, it can.