By noon today the Dow Jones Industrial Average was down 400 points. This follows a 150 drop yesterday. The Federal Reserve’s Open Market Committee begins a two-day meeting today at which most expect them to hold interest rates steady.
This will be the last meeting with Janet Yellen as Fed chair. When she steps down at the end of this week, Trump nominee Jerome Powell will take the reigns, after an 84-13 approval vote in the Senate.
Though Powell is seen as dovish on interest rates, a tight labor market and a steadily increasing 10-year bond yield – now the highest in over four years at 2.71% – have most economists predicting the Fed will raise rates three to four times in 2018 beginning in March.
The euphoria over Trump’s corporate tax cuts may soon exhaust itself under the weight of the quiet beginnings of a trade war involving the US, EU, Canada, Mexico, South Korea and China. Trump has announced tariffs on certain imports from these countries, including washing machines, steel, and solar panels.
Yesterday Trump trade representative Robert Lighthizer wrapped up a NAFTA meeting in Montreal by going after Canadian car imports. By the time these talks finish NAFTA will be unrecognizable if it survives at all.
While the end of free money via rising interest rates worries the banker owners of the stock market, it is Trump’s increasingly protectionist actions that keep the chubby little inbreds up at night.
Add to this the historically high P/E ratios on stocks, and bubbles in both real estate and credit markets, and there is plenty to worry about for those long stocks and bonds.
Barclays economist Michael Gapen wrote today that, “the risks of a hard landing are rising” for the US economy. Gapen cites increasing wage pressures from a falling unemployment rate and an uptick in consumer spending, which has driven US savings rates to all-time lows. Any increase in interest rates will leave these millions of credit-card junkies in the lurch, whilst also dampening the exuberance in an overheated housing market.
In short, three major bubbles look set to burst in 2018: stocks, bonds and real estate. Reduce exposure to these, pay down debt and increase savings. Things are about to get interesting.
Dean Henderson is the author of five books: Big Oil & Their Bankers in the Persian Gulf: Four Horsemen, Eight Families & Their Global Intelligence, Narcotics & Terror Network, The Grateful Unrich: Revolution in 50 Countries, Das Kartell der Federal Reserve, Stickin’ it to the Matrix & The Federal Reserve Cartel. You can subscribe free to his weekly Left Hook column @www.hendersonlefthook.wordpress.com