The Recent Stock Market Crash Warns of a Global Recession in 2019
The stock market crash has arrived; the Dow and Nasdaq indices have given up all their gains since President Donald Trump signed the tax cuts. There’s no hint as to how deep it will go or when it will end. The timing seems appropriate for a conversation about a global recession.
Whether it’s any of the growing number of negative factors, from trade tariffs with China and midterm election uncertainties to concerns over Italy, the euro, and higher interest rates, the global economy is sending alarming signs.
Recession is in the air. Still, even as a pessimist about the current economic cycle, I believe stocks will recover from their recent losses and give the market one last run.
The real test for the tenure of the U.S. economy will come after the midterms.
Trump Spooked the Markets Just in Time for Halloween
He said he would continue pressing China with tariffs, threatening to add duties on an additional $257.0 billion worth of goods if he doesn’t get a “great deal” from Chinese President Xi Jinping. (Source: “Trump says he expects a ‘great deal’ with China, but warned more tariffs are coming if he doesn’t get it,” CNBC, October 30, 2018.)
Boeing Co (NYSE:BA) lost almost six percent on the news, given that investors expect it to be the target of Chinese retaliatory tariffs. Nevertheless, Trump has delayed negotiations with China until after the midterms.
I expect that delay to be a deliberate effort to achieve the deal without alienating some of his supporters ahead of the November 6 vote.
The markets have spoken: they don’t like tariffs. And the stock market is the main source of legitimacy for President Trump. The recent crash may have hurt investors financially, but it hurt Trump politically.
Yet Trump has few recourses to halt the deeper and inevitable crash, which will trigger the next global recession. Cue the theme from Jaws, because “they” are coming.
“They” are the higher interest rates that will disrupt the stronger-than-expected performance of the American economy in the second and third quarters.
The interest rates will expose weaknesses that have stayed in the economy since the last global recession.
The Solutions Addressed the Symptoms Not the Causes of the Recession
The interest rate cuts, or quantitative easing (QE), that have allowed the markets to recover since 2009 served as a mere “Band-Aid.”
And the Federal Reserve, which operates independently of politics, was the one that lowered rates to near zero to prime the economy.
President Trump tried, however clumsily, to influence the Federal Reserve, fearing—correctly—that its schedule of rate hikes would discourage growth and cause the markets to crash.
The economy would have recovered more sustainably if, instead of the Fed-mandated QE, former President Barack Obama had tackled the causes rather than the symptoms of the recession that resulted from the 2008 financial crisis.
More New Deal and Less Neo-Liberalism
President Obama was clearly a skilled politician and a great orator.
In the wake of the disastrous Iraq war and the worst financial crisis since the Great Depression, President Obama had a mandate I like to compare to a toreador or a gladiator in the arena.
He could have employed several legal tools to tackle chronic problems in the U.S. economy: the kind that always intensify the pain of any recession.
Obama should have pushed through a more comprehensive healthcare reform, focused on the end user rather than the insurance companies.
He could have mandated middle-class homeowners with mortgage bailouts and could have lowered taxes while making a radical shift away from the aggressive foreign policy decisions of his predecessor.
Instead, Obama doubled down on the Middle East, encouraging and involving American troops and funds in more Middle Eastern geostrategic catastrophes. (Source: “There Will Be No Blue Wave,” The American Conservative, October 29, 2018.)
Thus, if anyone continues to wonder why Trump won in 2016, he/she is advised to look closer to Washington rather than Moscow.
As they say, “It’s the economy, stupid!” It’s always the economy.
The prospect of a more restrictive monetary policy, meanwhile, will ruin even Trump’s most aggressive tax cuts.
For starters, the fiscal infrastructure can’t take more pressure, given that the United States is already on the brink of a debt crisis.
And if the Federal Reserve has learned from the late October market crash, it’s that to avoid a recession, which risks becoming a global recession, it may have to inflict short-term pain now, instead of agony later.
Watch the FAANG
The FAANG stocks—that is, Facebook, Inc. (NASDAQ:FB), Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and Google or Alphabet Inc (NASDAQ:GOOGL)—and other tech stocks dropped hard.
And that was before any new Fed rate hike, highlighting the fact that the fundamentals of some of the best-performing stocks of the past few years are lacking.
Perhaps investors will learn their lesson and start looking for higher quality and long-term potential after the recent crash.
Yet, that’s an overly optimistic prospect. Rarely do investors and gamblers learn.
And then there’s Europe, whose markets have not performed as bullishly as Wall Street. Despite the greater “restraint,” their economy has also not followed the right prescription to confront the post-2008 financial crisis.
The European Central Bank (ECB) has also lowered interest rates to near zero. Doing so has helped the economies of many EU states survive, at best. But, few, other than the usual suspects, (Germany, Austria, and a handful of others) have grown in any significant degree.
Italy, which remains Europe’s third-largest economy and second only to Germany in industrial capacity, has triggered another euro crisis. It could have far worse effects than the Greek crisis of 2014–2015.
The eurozone could have survived Greece’s exit from the EU (Grexit), but it will hardly survive Italy’s exit.
The new Italian government has decided to snub the EU, running a much higher deficit, having jettisoned the “austerity” policies (strict control on public spending, high fiscal pressure) that the EU imposed.
Outrageous Solutions Highlight Eurozone Troubles
Consider what Karsten Wendorff, a senior manager in Germany’s central bank, the Bundesbank, suggested.
He proposed the kind of solution to Italy’s debt problem that can only result in a mass protest of people, including otherwise reasonable and peaceful middle-class folks, enhanced by pitchforks.
The plan—and this is no joke—would have any Italian resident with the luck of having managed to keep something in a savings account to be forced to pay some 20% of their assets toward a special fund, devoted exclusively to paying down the public debt. (Source: “A Bundesbank Economist Has a Radical Plan to Halve Italy’s Debt,” Bloomberg, October 27, 2018.)
That is precisely the sort of approach that many Italians and other EU citizens are fighting. The very suggestion of such a plan will build the case for an exit from the euro.
Italy’s Departure From the Eurozone Would Have Far Worse Effects Than Greece
Such a move would cause a financial collapse in the EU and it would send ripples worldwide.
Such is the overall outlook, or framework, that financial markets and the West’s economies must face now.
“Damned if you do and damned if you don’t” interest rate scenarios mix with political tensions and tariffs on international trade to create severe debt concerns.
Any one of these alone has the power of triggering a recession.
Three of them together become an unstoppable force of worldwide financial disaster. And they are all coming to a head in the next few weeks.
Perhaps there are ways that the recession will be delayed. But 2019 appears to be the year of the next recession. The more investors ponder this possibility, the higher the chances of it being fulfilled.
Nobody should be so arrogant as to claim the ability to predict the exact timing of the next global recession.
Still, even if such a fortune teller existed, their crystal ball would urge investors to review their portfolios and weed out the highest-risk stocks and investments.