Could This Spark a U.S. Financial Collapse in 2017?
Financial Collapse 2017 a Real Possibility as Trump Will Face Obstacles
The fact that several key political personalities will not attend Donald Trump’s presidential inauguration is the first sign that something is unusual. Trump will galvanize Washington, but political risk in the U.S. has never been greater. This could easily spill to Wall Street and the financial collapse 2017 possibilities—if not probabilities—are high.
Economic collapse and financial collapse are phenomena associated with years ending in “7.” Here’s a memory refresher: 1987 Crash on Wall Street; 1997 Financial Collapse of the Asian Tigers; 2007 Subprime Crisis leading to Financial Collapse 2008. As for 2017, there are fewer answers and predictions than risks.
Superstitious or Not, 1929 Is Relevant to the Risk of a U.S. Economic Collapse in 2017
Logically, the granddaddy of the most famous financial collapse of the past 100 years, the 1929 crash does not end with a “7.” But, 1927 did offer a hint of what was to come. The atmosphere in 1929 was electric. It was the peak of the “Roaring 20s.” Like the market-driven growth of the past few years—as the Dow gets ready to cross 20,000—it was a period of optimism.
Investors had confidence in the market. They had no time to even consider the economic consequences of a financial collapse. The feeling was one of an unlimited and indefinite growth of wealth and well-being. Politicians who advised caution, urging measures to pull the brakes on the euphoria, met the resistance of an unwavering trust in the free market.
Nor was there any obstacle to the incredible wave of speculative euphoria that the stock market experienced in previous years, encouraged by the prospect of easy money by buying low and selling high. But, even before 1929, the foundations of the system were obviously fragile.
And, in fact, there were some rumblings in the years 1920-21 and later, in 1927—there’s that eerie “7” again. Since 1927, in fact that very year, investments stopped increasing. But worse, and of greater concern, salaries, wages, and even sales of cars diminished. It was only the expectation driven by speculation that offered the illusion of a continuous and unstoppable progress.
But the system was rotten. Credit now was also—another warning from the past—cheap. Actual productive activity was dropping in 1929 and the focus was on market speculation. In 2017, the speculation party continues as the bubble keeps rising.
There are tighter regulations today to prevent this, but there are sufficient similarities between 2017 and 1929 to sound off the bubble financial collapse alarm. In 2017, investors everywhere will experience the first interest rate hike in a decade.
Anyone who started working on Wall Street or any other major global financial address less than ten years ago will be faced with a new risk—one they’ve never had to confront before. There are people on Wall Street for whom an interest rate hike will be a complete novelty. The Federal Reserve plans two or even three more hikes.
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How to Protect Yourself from Financial Collapse
The effects of more expensive money after such a prolonged period of low-interest-rate-fueled growth are uncertain at best. How to protect yourself from financial collapse depends on how well you understand the risks. This is hardly bullish. But the following considerations might help investors navigate the 2017 markets without succumbing to the siren call of the Dow at 20,000.
Those whose crystal balls are offline must rely on the past to make informed decisions. The economic consequences of a financial collapse are still fresh in our memory: home foreclosures, unemployment, lower consumption, scarcer credit, and the banks finding ways to bail out on their responsibilities.
If the markets crash, as they could in 2017, it would certainly create a “financial collapse 2008”-style recession. These are some of the warning signs from last year that could help investors survive the coming—and potentially tumultuous—months.
Notwithstanding the many popular celebrities whose deaths captured the public’s imagination, 2016 will be remembered for having generated considerable political turmoil—especially in the West. The U.K.’s vote to leave the European Union and the election of Donald Trump were, contrary to media expectations, highly predictable.
But to predict them, analysts would have had to understand what was happening beyond their limited circles of like-minded Londoners, Californians, or New Yorkers. The British vote to leave the European Union (Brexit) and the election of Donald Trump confirmed and highlighted the disaffection between “regular people” with the traditional parties and politicians.
The Politics of Turmoil Could Trigger Economic and Financial Collapse
This is just the start. Brexit and Trump’s successes will encourage the rise of more libertarian and like-minded politics in 2017. This politics of turmoil has disruption of the system written all over it. As in 2016, politics will remain in the heart of events in 2017. It will again affect, if not maintain outright control of, events in the financial markets.
Even if the markers have buoyed in the first two weeks of 2017, the economic cycle appears to be winding up. The next earnings season could show a slowdown, given the shift in the credit cycle that the Fed has launched. The current modest tightening of lending from the Fed might backfire, even as more rate hikes are planned.
Yet, the European Central Bank (ECB) and the Bank of Japan (BoJ) continue to pursue their monetary easing paths. But so far, these have not given any of the desired effects. Inflation and actual economic growth are as elusive in the Eurozone as in Japan. Quantitative Easing (QE) has not worked. There is nothing to suggest a reversal of QE would stimulate growth any faster.
Therefore, macroeconomic risks have increased just as Wall Street has reached a possible peak. The ECB will be hard-pressed to consider some changes, yet to do so would be to unbalance a teetering European system. The EU will be subject to an exacerbation of existing geopolitical shocks in 2017.
One of the main concerns for the EU will be the policy on refugees and relations with Turkey. Refugees, or migrants as they are often called, have not ceased to land on European shores. In 2016, some 180,000 refugees landed in Italy alone. Germany, while fewer than the previous year, still took in 283,000 refugees while Greece continues to be the main point of arrival for refugees from Syria and other parts of the Middle East and Asia.
Why is this a macroeconomic concern for Europe—and the world? Because the refugee crisis has highlighted that there is such a thing as European “Disunion” more than a Union. Italy is trying to stem the inflow of migrants by trying to secure an agreement with Libya, from where most of the refugees—the majority of which are economic migrants from places like Nigeria rather than refugees from wars—depart.
But, Libya is weak. It’s split in two if not three parts. There are rival tribes, rival factions, and rival leaders. Italy has offered various “carrots” or incentives to the internationally-recognized government in Tripoli. But for this to have even a minor curb on migration, it would take all other EU states to secure individual agreements with Tripoli.
No such coordination is in the cards within the Union. Germany, meanwhile is under pressure to tighten its borders after letting in 283,000 refugees in 2016—less than in 2015. The Berlin terror attack last December has highlighted the risks of Angela Merkel’s generous policy. The German government is under pressure to reduce or eliminate the migrant policy altogether.
Americans are affected also. The migrant crisis is one of the main defense and security threats in the world now. Turkey, still in NATO but distant, remains a major question mark. It has gotten closer to Russia in the past year, altering the balance of power in the Middle East. Trump wants to shift U.S. policy even closer to Israel, deepening the strain in a region already saturated with tension.
Donald Trump has advocated a more isolationist American foreign policy. It’s one of the pillars of his electoral campaign. But the geopolitical picture a few days before his inauguration suggests he will not be able to extricate himself from the highly interventionist legacy of the past 16 years.
This will force Trump, at least in his first year—if not longer—to compromise his ambitious foreign policy shift. Much of the shift involves trade. Therefore it affects his economic programs, limiting his ability to change.
The Obstacles to Trump’s Proposed Isolationist Stimulus Policy
Thus, the prospects of moving back jobs from China, managing the credit bubble, and pulling away from NATO will be more distant in 2017. Add to that the already-challenging election calendar in the EU. There is Holland in March, France in April/May, and Germany (probably in September). Italy could be among these as well next June.
All the above elections have the seeds of major disruptions. The oppositions in all these countries have gained momentum and they challenge the existing order. They challenge the euro. If Brexit did not result in a major market crash, it’s because the U.K. remained independent from the Eurozone. If merely one of those elections falls to the Eurosceptic oppositions, it could spell the end of the Euro.
Another factor that could cause financial uncertainty is Trump’s realism on the “climate.” He is, refreshingly, skeptic on man made global warming—or climate change, as they call it now to confront the conflicting evidence. In market terms, this means that opportunities for renewable and alternative energies will be more limited than under the outgoing administration.
Many countries and individual states have adopted ‘carbon’ taxes or related ‘cap and trade’ schemes. These benefit companies that make electric cars like Tesla Motors Inc (NASDAQ:TSLA), wind turbines, solar panels, or home power lithium batteries. This segment needs long-term vision. Technology needs time to bear fruit.
But, Trump’s election and his promised return to coal—many of his votes came from the rustbelt states like Pennsylvania, once major coal producers. If Trump follows through on his plans, it could spell a collapse of the alternative energy worldwide. But, the big question is “if.”
Keep a Close Watch on Copper
Trump wants to change too many things and the global context makes it difficult for him to follow through. U.S. economic collapse in 2017 is such a strong possibility because the markets have placed too many expectations in the new President.
It won’t take long for the market to realize that the new president will struggle to achieve his promised investments at the macro level—suggested by the bullish markets at the end of 2016 and the rise of the price of copper. The latter is typically a bullish sign for industrial recovery.
Indeed, if you are wondering how to protect yourself from economic collapse, keeping a close watch on the value of copper is an important hedge. Faced with a growing national discontent, Trump will apply his economic protectionism. Trade barriers are the first tool at his disposal and by applying them, he could prompt a slowdown in global growth.
One of the ways this will manifest itself is a fading of China’s demand for industrial metals—like copper. Copper is now at the highest price in over a year. It’s trading at about $2.60-$2.70/lb. Should it move back to $2.00—or lower—it’s a sign of a major economic slowdown. Indeed, it might be one of the first signs of the financial collapse. Trump will try to adopt his stimulus growth policy to boost employment.
His re-election chances depend on it. Whether the plan works is not certain. What is certain is that a stimulus policy could easily add to the existing $20.0 trillion in U.S. national debt. If it works, meanwhile, it will trigger a sudden surge of inflation, forcing the Federal Reserve to step up its rate hikes and relegating the dollar to the realm of NASA, because its value could hit the moon.
Emerging markets and China in particular will look for alternative currencies and alternative forms of payment not linked to central banks, such as cryptocurrency. Bitcoin, as the prototypical cryptocurrency, will benefit from this. After becoming the darling of nerds and “geekazoid” types, Bitcoin could make inroads in central banks. Russia and China might propose to accept Bitcoin as a partial alternative to the mightier dollar.
Then there’s American healthcare spending. Reforms trigger panic in the industry. Yet, at about 17% of GDP, compared to a world average of 10%, American spending on healthcare is among the highest. All the while, a large percentage of the U.S. population cannot afford to pay their medical expenses. The initial relief rally in healthcare-related stocks, witnessed immediately after Trump won the election, could dissolve in 2017. Investors will realize that his administration will try to undo the reforms with other reforms, making the system more unproductive and expensive.
Then there are Canada and Mexico, The United States’ partners in the North American Free Trade Agreement (NAFTA). The market may have placed too much faith in Donald Trump’s intention, or ability, to regulate trade with Mexico.
Meanwhile, Canada is suffering because higher interest rates have started a contraction of credit in one of the most indebted private sectors in the world. Canadian banks succumb to the pressure, forcing the Bank of Canada to do quantitative easing by injecting capital into the financial system to avert a crisis and maintain the appearance of a healthy economy.
The markets welcomed Trump’s victory. But, the sum total of risks and geopolitical realties make it difficult to reconcile a balance between these factors. It’s best to prepare for a period of volatility, in search of a clearer direction. The wait will not automatically spare the markets from a financial collapse.
Uncertainty is inevitable when it comes to investments. But, it is undeniable that the Trump factor adds a big unknown that could prompt a revaluation of certain assets. 2017 could be the year when the financial and economic collapse begin, leading to a renewal of the entire system. The U.S. debt situation is disastrous. The deficit of the U.S. trade balance has been negative for the last forty years.
In short: the United States has lived beyond its means for over 50 years. Rather than tighten the dollar, in the next few years the United States might have to revamp monetary expansion to meet the huge public debt. Therefore nobody should downplay the possibility of a U.S. economic collapse in 2017.