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20% of US firms are being squeezed by interest rates, another $200bn worth of tariffs, CitiBank’s ‘global economic surprise index’, Manufacturers in Europe hit new lows, Michael Roberts, South Korea also appears to be slowing down, The European and Asian stock markets, the Trump tax cuts, The US stock market
The US stock market turned volatile this week and has now erased all the gains made up to now in 2018 in just a week or so. So much for Trump’s boast that things for rich investors have never been better. The fall in the US market has been matched by similar drops in the European and Asian stock markets. The all-world index has had its worst performance since the Euro debt crisis of 2012.
Now this fall could just be what market traders call a ‘correction’ and not a full ‘bear market’, when the prices of shares enter a long and deep decline. But it could be that investors are beginning to fear that the boost to profits and sales that the Trump tax cuts generated is soon to be over, while interest rates (the cost of borrowing to invest or buy back shares to boost prices) are rising…
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While it is true Trump’s tax cuts have boosted US profits by 20% (S&P500), it is not true that the tax cuts will fade in 2019. And while it is also true that Fed rate hikes will raise business costs, it is not the whole story either. US multinational corporations know that currency collapse in emerging markets and resulting deepening recessions in EMEs means rising import costs and thus less demand for US goods, as well as less revenue repatriation back to the US due to exchange rate rise in the value of the dollar. Profits from financial asset speculation are leveling out or falling (stocks, bonds, property sales, etc.) as well. Prices across the board in the US are rising, cutting into profits even more than rising interest rates costs. Private debt is reaching unsustainable levels–including household debt but business debt as leveraged loans, junk bonds, BBB investment grade bonds. The auto industry is stalling world wide and housing is in contraction. Trump tax cuts are failing to produce predicted (supply side bullshit theory) real investment, latest registering only 0.4% growth for the third quarter in the US. (The trump tax cuts going into mostly financial assets–buybacks, dividends, etc. now at record $1.2 to $1.5T for 2018–and other financial speculation.) Investors are beginning to take their money and run–a clear harbinger of recession coming. Trump’s 3.5% GDP is being driven by military spending, consumer spending built on record household debt runup, and business inventories which are about to bust and will contract sharply in early 2019 as consumer spending retreats rapidly. In short, the current weakening economic scenario cannot be understood by simply referring to rising interest rates and Trump tax cuts for corporations and businesses. What’s occurring in financial markets in parallel and the growing concern over financing the record debt accumulation of last decade is also a major causal element.
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