Money, and having enough coming in every month to pay our bills is critical to our sense of well being.
Right now there’s a lot of turmoil and confusion across the global economic spectrum and many of us are getting anxious about how this is all going to play out.
What follows is yet another attempt to express my belief that a significant economic slowdown is coming. I just have no idea how deep it will be and when it will appear in our faces. Just that it will.
Over the years, I’ve subscribed to various financial companies whose periodic reports are both timely and insightful. One of them is Guggenheim Investments.
Scott Minerd is their Chairman of Investments and Global Chief Investment Officer. I recall having heard and met Scott on several occasions some 20-30 years ago at various conferences. He was not with Guggenheim in those days but he left an impression on me. Today, Guggenheim is a very significant player in the world of money.
Guggenheims’ most recent quarterly report has this headline: Looking Past the Liquidity-Driven Rally. Here is a key takeaway from the Fixed-Income Outlook report dated August 21, 2019:
- We do not think the current rally in risk assets is sustainable. Earnings have weakened, and although some corporations have focused on de-leveraging, average leverage multiples for the index remain near historical highs.
The report itself if pretty technical, full of financial jargon that’s hard to understand if you’re not from that world. I’ve put a link below to a report article if you want to read it. My takeaway is we are moving toward a period where short term interest rates are negative. That has huge economic implications, few of them good.
Negative interest rates happen when the lender gets paid back less than what was loaned. Right now and for centuries, you and I, or corporate America, or cities and municipalities, have placed our money in banks and they’ve paid us interest for the use of our money.
With negative interest rates, we get to pay them for holding our money. It’s happening right now in the banking systems of Japan, Germany, France and other European countries. Keep in mind that our beloved President, Donald Trump, is pushing hard for the Fed to further reduce interest rates. His apparent logic is political in that it might keep the US economy from crashing before the 2020 election. Or it may come crashing down before then. In my opinion, the chances of no crash are slim and none.
This is unlikely to end well for you and me. The tax cut which was supposed to give consumers like you and me more money to spend, has instead cost us almost $100 billion. Corporations who got most of the tax breaks were supposed to use that money to invest in new things. Hasn’t happened. Apple, for example, is sitting on $245 billion in cash. How come they’re not investing it, buying more companies, or putting it to work somewhere?
Before any of this gets better for you and me, it will probably get much uglier. Meanwhile the global economy is slowing and there are multiple examples of a slowing economy here in the US.
Portfolio Management Outlook: Avoiding the Fate of ’98 is an article found inside the Guggenheim report named above. If you’d like to read it, you can find it here: https://tinyurl.com/y54poy73
Tony Kendzior \ August 26, 2019