Financial Crisis – Lessons?

BarroMetrics Views: Financial Crisis – Lessons?

A few readers have written asking why my US long-term, fundamental, view is so pessimistic. Here’s why.

My view is defined by Austrian economics, the only economics, I believe, that explains the business cycle.

In summary, the Austrian view is when a government inflates the money supply, especially when the increase rises faster than the increases in goods and services, we see malinvestment. In the 21st century, this has taken the shape of a housing bubble that was followed by a stock market rise.  At some point, the malinvestment has to correct. That correction takes the form of a severe recession or depression. The longer the money supply was inflated, the more severe the recession.

The 2016 US deficit came in at USD 19.537B (see The Feds Borrow More than the Deficit; the site also shows the deficits since 2000). What has that brought?

Well, it brought the housing bubble and the 2007 crisis. And since 2007, it has provided a stock market rally that to date is the second longest in history.

But what about the economy?

Figure 1 shows the GDP number from Shadow Stats from 1984 to 2016. You see that since 2004, the US economy has not grown in real terms (it has remained below ‘0’ line). Also, despite the money thrown at it since 2007, both the official and Shadow Stats numbers have remained in a sideways mode.

Now since Trump’s election in Nov, the S&P doubled its increase from the beginning of the year – due perhaps to an increase in bullish sentiment.

But, I see little in Trump’s to suggest he’ll turn around the economy.

Sure, there are some great ideas, reduce Government red tape, adopt policies that will boost jobs, cut tax. On the other hand, we’ll see expenditure on the Wall and other infrastructural spendings; we’ll also see increased spending on the US armed forces. Moreover, the spending will come first, and I have doubts the budget for 2017 and beyond will balance, let alone make up for the accumulated deficits.

So, we will see a stock market crash and at least a severe recession at some point. The problem for the trader, that some point can a long time coming. In the meantime, for US equities and indexes, you need to be long or out of the market.

FIGURE 1 GDP Shadow Stats

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