Even with spiked volatility and the inevitable business cycle expectation of a stock market correction, the economy itself continues to hum along!

What Keeps Us Awake at Night…

We never hide our excitement for this economy.  Even with spiked volatility and the inevitable business cycle expectation of a stock market correction, the economy itself continues to hum along!

Wall Street is certainly overbought – a decade of bad monetary policy and government over-regulation gave us an artificial increase in our portfolio, without any job growth, wage growth or economic growth.  This means inevitably we will see market reversals.

But the economy itself – Main Street, NOT Wall Street – is as strong as it has been in decades.  Every month continues to bring positive, real growth numbers.  Consider:

1)  3rd Quarter GDP at 3.5% … annual growth rate above 3% for the first time in years.

2) Unemployment is at record lows – +3.7% .. the lowest since 1969!!!

3)  Wages are growing for the first time in a decade, +3.1% year over year, and are still in positive territory after adjusting for inflation.

4) There are 7.1 million job openings, but only 6.2 million available workers at the end of the 3rd quarter.

With all this great news, what possibly could keep us up at night?  As stated many times, the economy has not looked this good since the Reagan era!

Here are the 3 big economic issues that are keeping us awake at night:

1.“US-China conflict is getting hotter by the day”:   China’s military is war-gaming nuclear attacks against the US homeland … Trump is threatening tariff’s on ALL goods coming from China if a deal isn’t struck … markets are influenced by news reports because traders react to the daily headlines and move client money based upon short term information.  The expanding GDP is benefitting from corporate profitability, which will be impacted by changes to the US-China trade relationship.  This is a high-stakes game Trump is playing with China, one we are built to win, but could still take a whole lot of damage along the way.  Make no mistake, this administration is forcing the US and US companies to disengage from China – the outcome remains unknown.  Markets hate the unknown.

 2.“Does the Fed know what it is doing?”  We have supported here in our blog the Fed raising its benchmark rate for years.  When they finally officially ended their zero-interest rate policy (ZIRP) in 2015, and began raising rates, we applauded.   Raising rates and strengthening the dollar is what we argued for, and we believe is a strong move for a healthy economy.  But further rate hikes could be the cause of the correction and could tip the scales from a mild down-trend to a massive sell-off.  Stocks have already lost technical momentum, falling below their 200-week moving average.  The Fed’s new desire to increase rates despite changes in the environment could prove fool-hardy in the long run.

3.“Europe moves against the dollar”:  Such sentiment would have been unthinkable just a decade ago, but while Trump gets pilloried in the mainstream press for his “America First” mantra, he is usually proven right by global events.  Such an event was the most recent European move to create a dollar-less payment facility to allow European corporations to still do business with Iran and help circumvent US sanctions.  The result will be an entity that can accept non-dollar payments on one end, and convert money into dollars on the other side of the transaction, or even preferably, into Euros.  Fellow Western countries, allies, NATO countries seeking to circumvent US security policy in this manner would have simply been unthinkable until recently.  Yet that is where we are.  Never missing a chance to stick it to us, the Russians and Chinese jumped in with full support behind this new payment facility.  Whether it will work remains a question mark … if it does work, what European countries or businesses will be willing to risk losing the US market? Probably zero. But combined with Saudi moves on the dollar from this past spring, and other global players wanting out from under US financial control – this European move has opened some eyes as to what  future dollar-less world could look like.

Halloween has just passed – lots of treats have come our way in the last two years … but there are some tricks that could serve as headwinds if we don’t avoid them.  A business cycle correction we are due for – an epic bear market reaching crisis level risks will happen if we are not mindful of those risks, some of which we have mentioned here.  That is what keeps us up at night.

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