Tuesday, February 21, 2017

Is the Trump Rally a Financial Bubble or Real Growth?



Trump has been taking credit for the rapidly rising stock market, which Wall Street has termed the "Trump Rally." The rally, and the boom in the capital market that followed the 2008 financial crisis, is deceptive, and does not really reflect any meaningful economic growth. It, indeed, hides the real problem that inflict the US economy, the increasingly excessive greed that plagues the financial market and the business conglomerates that  seem to be more interested in creating private wealth than growing the economy. The problem is not limited to the US but has a global dimension.

The moderate improvement in the economy in the seven years that passed since the financial crisis of 2008 is mainly connected to the recovery in stock prices and financial growth. The stock market recovery is achieved by accumulating more debts, both public and private. The US national debt has doubled since Barak Obama took office in 2009. US debt currently exceeds the annual Gross Domestic Product (GDP), reaching $19 Trillion in 2016. Servicing this enormous debt cost the taxpayer around $240 billion, and amount that exceeds the federal allocation for education, health, social security, and transportation combined. Corporate Debt currently exceeds $51 Trillion, and has been on the rise, and has more than doubled since 2006, and is projected to reach $75 Trillion by 2020.
The so-called "Trump Rally" that began few weeks prior to Trump taking office has been very impressive, amounting to 13% overall increase in stock market value, but in many ways it is a financial bubble, similar to the one took place shortly before the 1999 financial crash, better known as the "Dot Com Bubble." Indeed the rally has nothing to do with Trump. It is purely an effort by leading financial centers to avoid a necessary financial correction, for fear that such correction would drag the capital market all the way to the ground.
The “Trump Rally” bubble is evident. Rise in stock prices is not supported by corporate earnings or GDP. Earnings and GDP have been on the decline since 2015, making stock prices overly speculative and unsustainable. For instance, forward earnings are on average 24 times greater than real earnings. What makes the situation even worse is that increase in corporate earnings in the interim years of 2012-2015 is driven not by rise of innovation, sale, or productivity, but by an aggressive money supply scheme.
The aggressive money lending program pushed by federal banks is promoted under the rubric of “Quantitative Easing.” The federal system has made available 3.5 Trillion for borrowing at a very low rate, and company have used much of this amount not to expand their operations, but to buy back their own stocks. The aggressive buyback was then translated by deceptive accounting methods into an increase of earnings of companies that spent their borrowed money in financial speculation.
The real engine of global growth has been fueled in the last three decades the breathtaking growth of the Chinese economy.   But China, which has enjoyed an annual growth of 9-15%, compared to 2-3% for USA, is currently facing serious economic slowdown, and has dropped in 2016 to 5-6% growth rate. The Chinese economy has finally caught with the slow global economic growth, and China, like most advanced economy, is now faced with a staggering corporate debt that exceed $18 Trillion, or 250% the country GDP. The debt problem is no more an American problem, but is also a world problem. Global debt totals currently amount to $250 Trillion, of which $150 Trillion is a public debt, and $150 Trillion private. The total global debt is almost 325% of the combined annual value of global products.
No real plan has been put anywhere to address the debt problem by any national or international body. The world economy is currently so interconnect in both the capital and labor markets, and any disturbance for the fragile international system could produce an economic crisis of global proportion. The current administration seems to be completely oblivious to dangers of the reckless tinkering with the economy in the reactive and free-floating style of Mr. Trump. The president responsible for the largest economy has been busy closing American borders in the face of legal immigrants, and threatening tariff war to force US companies to adopt a mercantilist-type economics. If his threats come to fruition, we will soon witness sharp shrinking of the global market, and the onslaught of a new recession with serious consequences for both the economy and society.

No comments: