U.S. Economic Collapse a Possibility in 2016
A U.S. economic collapse in 2016? It seems pretty farfetched that the biggest economy in the world would stumble so much in 2016 that its economy would collapse. After all, stocks are trading near record highs and the Wharton grads on Wall Street are telling us that the U.S. economy is heading in the right direction.
But it isn’t. There are more than enough economic indicators, available for everyone to review, that suggest the U.S. economy could experience an economic collapse in 2016. But that’s not what we’re being led to believe.
The same economists who failed to see the warnings signs ahead of the economic collapse that came with the Great Recession and stock market crash in 2008…are ignoring the same warning signs today. The U.S. economy is not nearly as stable as we’re being led to believe. In fact, the U.S. economy is facing more turbulence than before the Great Recession.
When you look at all the data, the U.S. could experience an economic collapse in 2016. Which might come as a surprise to Wall Street and Main Street. First off, most economists don’t think the U.S. will experience a downturn until 2018. If not then, then we’ll have to wait until 2020. (Source: Bloomberg.com, last accessed September 22, 2015.)
Second, the 2018 downturn will surprise Main Street because most American’s are probably not even aware that we are in the midst of an economic recovery. Most cash-strapped American’s have not been able to benefit from the long-in-the-tooth bull market, underemployment remains stubbornly high, inflation is much higher than what the official reports, half of American’s can’t scrape together $400 for an emergency, wages remain stagnant, and roughly 15% of the country received food stamps.
This is the state of the U.S. economy after the Federal Reserve printed off trillions of dollars in an effort to kick-start the economy. Phew. Can you imagine how bad the U.S. economy would be right now if the Federal Reserve hadn’t meddled?
Sign #1: President Obama Not Telling the Truth About U.S. Economic Collapse
With inflation low it doesn’t really matter if wages are flat right? Wrong. And the official U.S. economic data is seriously skewed…to support Capitol Hill’s thesis that the U.S. economy is rock solid.
According to the most recent government statistics, inflation was just 0.6% between January and July. You may be surprised to know that this data does not take into consideration our most basic needs, such as food and energy. (Source: Bureau of Labor Statistics, September 22, 2015.)
To see how inflation impacts the average American it might be a good idea to look at what American’s pay for every-day items. It’s one thing to say flat wages are O.K. if inflation is under wraps…but it’s quite another thing if that’s not a true statement. That’s why it’s important to step back from the so-called official government data and see how inflation is affecting us around the country.
The most popular alternative non-government measure of inflation is the Chapwood Index. This index looks at the unadjusted costs and price fluctuations on the top 500 items we spend our money on in the 50 largest cities in the country. (Source: chapwoodindex.com, last accessed September 22, 2015.)
This straight forward approach may not be the economic Bible Wall Street follows like the outdated Consumer Price Index (CPI) but it’s far better at explaining why, in part, the U.S. middle-class and retirees cannot maintain their standard of living.
The Chapwood index looks at the price fluctuations in the cost of such everyday items as insurance, gas, fast food restaurants, toothpaste, oil changes, a Starbucks coffee, Advil, car washes, cable TV and Internet, dry cleaning, movie tickets, cellphone service, piano lessons, laundry detergent, pet food, People magazine, etc. You get the idea.
According to the U.S. government, in 2014, the CPI increased a measly 0.8%. But according to the Chapwood Index, in major cities like Boston, Chicago, Detroit, Los Angeles, New York, Oakland, San Diego, San Francisco, and San Jose inflation was over 10%.
Well, Chicago and Detroit ruined the curve. In Chicago, inflation was pegged at just 10.9% while it was 11.7% in Detroit. All of the other cities experienced a rise in the cost of living in excess of 12.0%. Still, even if you lived in Colorado Springs in 2014, the city with the lowest increase of 6.6%, your cost of living was significantly higher than the official rate of 0.8%.
What all of this means is, even if you were lucky enough to get a raise, chances are good it was close to a miserly 0.8%. Not the 10% you would need to cover your day-to-day expenses.
There’s more to inflation that higher prices at the grocery store though. Nominal Gross Domestic Product is evaluated at the current market prices, whereas GDP is the monetary value of finished goods and services. Nominal GDP differs from real GDP because it includes the changes in prices due to inflation or a rise in the overall price.
This is why it’s important to consider alternative, non-governmental measures of inflation.
Sign #2: Real Wages Tumbling for Average Americans
Falling or even stagnant wages is bad for the U.S. economy. That’s because approximately 70% of U.S. GDP comes from consumer spending. It’s tough to say the U.S. economy is going to chug along when the average American is struggling.
Despite the unemployment rate hovering around 5.0%, the underemployment rate (those working part time who want full-time work, and those who have stopped searching but want a job) remains above 10%. (Source: bls.gov, September last accessed 22, 2015.)
Moreover, most U.S. workers have not seen any improvement in wages. When you factor in inflation since the Great Recession ended in 2009, wages have declined the most for workers. The same can’t be said for upper management. (Source: nelp.org, last accessed September 22, 2015.)
Case in point, between 2009 and 2015, 20% of people in the lowest-paid occupations saw their wages decline an average of 5.7%. This includes those who work in food preparation, retail, personal care aids, cleaners, and home health aide.
That’s not the worst of it. If you’re a restaurant cook, your wages declined an average 9.8%; salaries for food prep workers dropped 7.7%; and home health aides, your wages fell an average 6.2%.
Overall, the purchasing power for all U.S. workers declined by four percent. This means, the cost of living in the U.S., even by official tallies, seriously outpaced any increase in pay. For millions of Americans this translates into having little or no economic security.
If real wages fall, consumers cannot make ends meet—let alone be expected to help propel the economy forward. Unless they turn to credit cards and loans. But then you have to pay those back, which is going to be tough to do if your wages aren’t going anywhere and the cost of living is increasing rapidly.
If consumers are forced to rein in spending, a U.S recession in 2016 is almost inevitable.
Sign #3: American’s Have No Money
Six years after the Great Recession ended, or rather, six years into the recovery, Americans are making less, having to spend more, and have little or no money set aside for emergencies.
More than one third (34%) of American adults do not have any emergency savings. This is actually up from 29% of adults reporting no emergency savings in 2014. This means 72 million Americans have no safety net in case they lose their job, have unexpected expenses, or can’t afford the rising cost of living expenses. (Source: neighborworks.org, last accessed September 22, 2015.)
Roughly half (47%) of American adults also say that their savings would last at most, three months. This is much higher than last year when 41% said reported emergency savings of less than 90 days.
Add it up, and 81% of Americans are at the breaking point.
According to financial experts, Americans should set aside 15% of their gross income in case of emergencies; this is in addition to retirement and other goals. Not many it seems are able to do this. In fact, American’s seem to be getting worse off the deeper we get into the so-called recovery.
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Sign #4: An Interest Rate Hike Could Cripple the U.S.
Americans may not have any money but at least they can rely on ultra-low interest rates to keep them out of the poor house.
Not for long.
The Federal Reserve’s fund rate has been declining for more than 30 years. An entire generation of Americans are accustomed to the low interest rate environment. This is good news for those with a mortgage, loan, or credit card debt. But this is about to change.
Most expect the Federal Reserve to raise interest rates later this years. If so, it will be the first time the Fed has raised rates in nearly a decade. Even though the increase is expected to be small, it could have a serious impact on borrowers. Especially when you consider the Fed is expected to raise rates again in 2016; putting an end to cheap money.
This is a good new/bad news scenario. The world needs normal interest rates. The artificially low rates provided by the Federal Reserve through its generous Quantitative Easing program, has taken ‘income’ out of fixed income investing and devastated retirement portfolios.
At the same time, rising interest rates could cripple those Americans cobbled by the so-called recovery. This includes anyone with little or no savings (see Sign #3) and those with large amounts of debt (including student loans – which you cannot default on).
It’s not just the U.S. that is swimming in debt or suffering from a lack of liquidity. The Bank for International Settlements (BIS) has warned of a gathering storm over excess borrowing and debt. The planet has taken on so much debt (thanks to easy monetary policies around the world), that a rate hike led by the Fed could send the whole world into a debt crisis. (Source: reuters.com, June 28, 2015.)
To wit, the total accumulated debt is higher now than it was before the start of the U.S. economic collapse in 2008. Since then, the world has taken on an additional $57.0 trillion in debt. At the end of 2014, the planet owed $199 trillion on a world economy worth about $80.0 trillion annually. China, the world’s second-largest economy, has quadrupled its debt since the last financial crisis. (Source:mckinsey.com, last accessed September 22, 2015.)
Sign #5: Global Economy Moribund
U.S. economic growth has been underwhelming at best. Immediately before the Great Recession (2016) the U.S. reported GDP growth of 2.7%. That was the last time we’d see numbers like that. In 2007, GDP was 1.8%. Then it got bad, in 2008 it was 0.3% and in 2009 -2.8%. (Source: worldbank.org, last accessed September 22, 2015.)
Like any bell curve, the U.S. economy had to get a little better. By 2012 the country’s GDP had risen to 2.3%, slipped to 2.2% in 2013 and bumped up to 2.4% in 2014. While second-quarter 2015 GDP advanced at a respectable 3.7% annualized rate, the country’s overall GDP has not been spectacular. Especially when you consider that we are the world’s largest economy.
China expects its GDP to grow at seven percent this year. Which may or may not be a little too optimistic. Still, relative to the United States, that’s exceptional. But for China, it represents the worst performance in more than 20 years.
If the two biggest economies in the world are struggling the rest of the world cannot be too far behind. Japan, the world’s third largest economy actually shrank by 1.6% in the second quarter and the future doesn’t exactly look bright. If history is any indicator. Over the last 14 quarter, Japan has posted seven uneven quarters of growth and seven quarters of contraction. (Source:wsj.com, last accessed September 22, 2015.)
The eurozone, the world’s biggest economic region, is treading water, supported mainly by Germany; France, Italy and Greece are economic millstones which has left the entire region teetering on recession.
It’s not just the economic juggernauts that could derail U.S. economic growth. Canada, a country with a population of just 35.6 million could be a drag on the U.S. economy. Canada is actually in a technical recession after announcing that second quarter GDP fell 0.5% after slipping -0.8% in the first quarter.
California has a bigger population than Canada, why would a recession up north have any impact on the U.S? Janet Yellen observed recently that while China’s economic turbulence was an issue, Canada’s economic slowdown was one of the reasons why the U.S. economy is too weak to raise interest rates.
She described Canada as “an important trading partner of ours that has been negatively affected by declining commodity prices, declining energy prices.” (Source: ft.com, September 22, 2015.)
While China is a major trading partner, Canada actually represents the number one export market, accounting for 19% of all exports. That’s more than double China’s seven percent share.
Further, Canada’s resource-heavy dollar has been in freefall, down 12% against the greenback since the beginning of the year. The Chinese yuan, on the other hand, is down just three percent.
Sign #6: U.S. Companies Increase Reliance on Foreign Sales
The U.S. is not an economic island. And we are not self-sustaining. That said, our increasing reliance on foreign sales could undermine our economic growth. And lead to a financial collapse. Why? A weak global economy and ongoing turbulence will put added pressure on U.S. markets. After all, stock exchanges are only as strong as the stocks that go into making them up.
Global economic growth is anemic. The U.S. cannot rely on any other major economy to carry it to prosperity. At the same time, the U.S. consumer cannot be expected to pick up the slack either. With interest rates already at zero, and many central banks adopting negative rates, there isn’t anything left in their bag of tricks to kick-start their local economies.
One recent study found that much of the global financial system is anchored to U.S borrowing rates. On average, a 100 point move in U.S. rates results in a 43 point move for emerging markets and open developed economies. A rise in interest rates, which we know is coming, could shock emerging economies and stagnant developed ones.
This could be a major issue for U.S. companies. For S&P 500 companies, the percentage of sales from foreign countries has increased after five years of stagnation. In 2014, the percentage of S&P 500 sales coming from outside the U.S. was 47.8%; a slight increase from 46.2% in 2013 and 46% for each of the previous four years. (Source: spindices.com, last accessed September 22, 2015.)
This increasing reliance on foreign sales certainly isn’t helping as far as important things like revenue and earnings go. The blended earnings decline for the third quarter of 2015 is projected at -4.4%. That’s much higher than the forecasted decline of just one percent at the start third quarter. If this data holds true, this will mark the first back-to-back quarter of earnings declines since 2009. With the kind of economic conditions we’re experiencing here in the U.S. and abroad, this could be the start of an earnings recession that could rival 2008. (Source: Factset.com, last accessed September 22, 2015)
As go earnings so go revenues. Third-quarter sales are forecast to contract -2.9%. This trumps the estimated year-over-year revenue decline of -2.5% predicted at the beginning of the quarter.
Sign #7: Over-Valued Stock Market Could Lead to Stock Market Crash in 2016
U.S. economic collapse signs one through six point to a stock market crash in 2016. Yes, stocks are riding high and investors are overly optimistic, but that’s part of the problem. Stocks are overvalued, we’re about to enter an earnings recession, and investors are cheering. Ignoring things like…fundamentals, leads to complacency and irrationality.
Eventually, artificially low interest rates, the fuel that has been sending stocks higher, will disappear and investors will be stuck valuating stocks based on earnings. And when they do, stocks will crash.
The writing is on the wall.
Even though the S&P 500 has been on a rollercoaster ride in 2015, investors remain optimistic. Today, roughly 33.3% of investors are bullish on the stock market for the next six months. That means, that between now (end of September) and the end of February, investors believe stocks are going to continue to reward them. (Source: aaii.com, last accessed September 22, 2015.)
Just 29.1% are bearish and an astonishing 37.6% are somehow neutral. Investor sentiment is at its most bullish since April. In the face of weak economic data here and abroad, U.S. stocks increasing their reliance on foreign sales, disappointing manufacturing data, investor’s remain optimistic. It doesn’t make sense.
Two key indicators illustrate just how overvalued U.S. stocks really are.
First, according to the Case Shiller CAPE P/E Ratio, the S&P 500 is overvalued by around 62%. The 10 year average for the ratio is 15; today, it’s floating at 24.34. That means, that for every $1.00 of earnings a company makes, investors are willing to pay $24.34. The only times this ratio has been higher was in 1929, 2000, and 2007. We all know what happened next, Great Depression, dotcom bubble burst, and Great Recession. (Source: Yale University, last accessed September 22, 2015.)
Second, is the market cap to GDP ratio. It’s been called the Warren Buffett indicator, since he calls it the single best measure of where valuations stand at any given moment. This ratio, as it name suggest, compares the total price of all publicly traded companies to GDP.
This kind of correlation makes sense because a country’s economic output and earnings should be related. And the underlying stocks and their valuations should be reflected, in part, with the benefits of investing or not investing.
A reading of 100% suggests U.S. stocks are fairly valued. The higher the ratio over 100%, the more overvalued the stock market. The market cap to GDP ratio is currently at 117.3%. The Warren Buffett Indicator has only been higher once since 1950. In 1999 it came in at 153.6%. It only stood at 108% before the housing bubble burst in 2008.
Eventually stocks and their valuations should line up. For that to happen though investors need to be shocked into it. And the only way that’s going to happen is if stocks crash. What would a crash look like today?
The S&P 500 is currently at 1,938; Shiller thinks it should be closer to 1,300. That suggests a drop of roughly 33%. Shiller also thinks the Dow Jones Industrial Average, which is at 16,280, should be closer to 11,000; a 32.5% correction. (Source: nytimes.com, last accessed September 22, 2015.)
That kind of a crash would seriously undermine the U.S. and global stock markets. This coupled with rising interest rates could also hammer the average American and negatively impact foreign markets.
Add it up. The U.S. economy is not doing well at all. The global economy is doing even worse. Whether you call it an economic collapse or crash, 2016 is not going to be a good year for the U.S. economy or stocks.