The Question I Am Asked Most Often
I am asked many questions about the economy and markets. They often focus on what is perceived to be excess euphoria in financial markets and if I believe the end is near for the so-called "good times". It's an understandable concern considering that this bull market is historic in length.
My basic thesis is that it is improbable that the type of euphoria we have seen in recent times will continue. I do not believe economic growth will continue to be as strong as it has been given rising debt loads on a global basis.
Still, if interest rates remain low and trade issues do not explode into an insurmountable hurdle, I do not see any reason why the economy cannot be at least somewhat stable. In fact, I think there's a reasonable chance that expansion will continue. It does bear watching the ongoing political drama as change in economic philosophies can impact market sentiment. We'll see how the presidential election goes in 2020.
The Chair of the Federal Reserve was asked a similar question regarding impending doom and if it is probable. He gave his answer, which was highlighted in a recent CNBC article by a great writer, Jeff Cox. I talk to Jeff from time to time on market issues. His comments in this article are listed below. It’s a long quote but I think worth reading.
Amid a roaring stock market and ever-increasing levels of corporate and government debt, Federal Reserve Chairman Jerome Powell said Thursday he does not see signs of bubbles brewing or immediate dangers being posed by trillion-dollar deficits.
“If you look at today’s economy, there’s nothing that’s really booming now that would want to bust,” Powell said in testimony before the House Budget Committee. “In other words, it’s a pretty sustainable picture.”
He added that the dollar’s status as the global reserve currency is helping forestall any trouble from the nation’s growing debt load, which just surpassed $23 trillion. “We are the strongest country, we have the best institutions, we have the best labor force,” he said. “We have such strengths, and I think possibly the day of reckoning could be quite far off.”
The central bank chief responded to a question as to whether he sees, as former Fed Chairman Alan Greenspan did in 1996, signs of “irrational exuberance” in financial markets, as well as another about the status of the government’s fiscal picture.
Overall, the U.S. economy is in the midst of its longest period of growth, a gain that dates to mid-2009 that has generally been slower than other recoveries but also steady. Powell said the nature of expansions now is to last longer than they have in the past.
“We think that really is because we are no longer facing high and volatile inflation,” he said. “What we’ve seen is three of the four longest business cycles in U.S. recorded history have been quite recent.”
He did issue warnings about several dangers such as a manufacturing slowdown and trade headwinds, and he again called the path of government debt unsustainable. The national debt is expanding at a faster pace than economic growth.
“I think by definition that makes it unsustainable,” Powell said of the debt. “Our children and grandchildren will be paying more of their tax dollars for interest on the borrowing that we’ve done.”
Solving the problem, he added, will require the economy growing faster than the debt, “and you have to do that for 10 or 20 years.”
Source: November 14, 2019, CNBC.com article by Jeff Cox
We simply cannot ignore debt. It will catch up to us at some point. In fact, I believe that our current low interest rate environment is a direct result of excess debt that needs to be kept at low interest rate levels.
Our sober view of the future and our assumption of economic headwinds is based on our view that the debt issue is likely to remain a problem. We have adjusted portfolios accordingly and will continue to do so based on this current outlook. If conditions change, we will adjust portfolios. In the meantime, we'll continue to be cautious in our perspective as we believe economic growth is likely to slow.
On a related note, I was interviewed recently for an article that will appear on CNBC.com regarding my views that the future likely will be more muted in terms of returns and euphoria. We will share that with you when posted.
If you have any questions about this information, please let us know.