We are at an interesting crossroads in the economy. For starters, equities markets are showing signs of a slowdown, despite the occasional surprise on the Dow Jones Industrial Average (DJIA). If recent trends are anything to go by, there is still plenty of juice in the tank for bourses to continue rising. The rapid growth of FinTech, digital currencies, and tech stocks in general is helping to keep markets afloat.
But clouds are forming on the horizon, in the form of decreased optimism over Trump Trade. The president has been mired in controversy ever since he took office, and his problems continue unabated. For starters, Trump’s inner circle has been eviscerated with people including Reince Priebus, Steve Bannon, Michael Flynn, Sean Spicer, Scaramucci, and others fired. This does not bode well for confidence in the presidency, and has created uncertainty in economic circles.
Despite the hullabaloo, markets celebrated the departure of right-wing nationalist Steve Bannon from the White House. His influence was largely perceived to be negative for Trump and the economy. After the Charlottesville protests, Trump apportioned equal blame on neo-Nazis and those against them. A media frenzy ensued, and this led to Bannon’s departure from the White House. Markets rallied upon hearing the news, as is so often the case in US politics, but closed the week lower on Friday, 18 August 2017. The current levels of the major US bourses are as follows:
- The Dow Jones Industrial Average closed down 0.35% at 21,674.51
- The S&P 500 Index closed down 0.18% at 2,425.55
- The NASDAQ composite index closed down 0.09% at 6,216.53
All the major indices in Europe including the Ibex 35, CAC40, DAX 30, FTSE 100 and EuroStoxx50 PR closed in the red on Friday, 18 August 2017. Judging from this snapshot of economic performance, equities markets appear to be in all sorts of trouble. Fortunately, all major indices are up for the year to date, if only marginally, and stocks are still performing better than investments in fixed-interest bearing accounts.
Interest Rate Concerns
One area of concern however is interest rates. The European Central Bank (ECB) recently alluded to adopting a go-slow approach to interest rate hikes. The performance of the European economy has not inspired enough confidence to reverse course on quantitative easing just yet. Interest rates are among the most important economic indicators of them all.
For starters, interest rates are reflective of the current state of the economy. If inflation is rising and the economy is at or near full employment, the central bank will push for an interest rate hike to siphon excess liquidity out of the economy. This makes that country’s currency relatively more valuable.
Based on demand/supply economics alone, the less of a currency there is available, the more valuable it becomes ceteris paribus. The ECB (European Central Bank) is currently dovish. Currently, Mario Draghi is pursuing an accommodative monetary policy – stimulus – to the European economy. When he eases up on that policy, the EU economy may be subject to rate hikes. Currently, the marginal lending facility is at 0.25%, and the deposit facility for fixed-rate tenders is -0.4%.
Growing Personal Debt Levels
In the United States, the FOMC has moved swiftly to start raising interest rates (the federal funds rate) to its current level of 1.00% – 1.25%. However, the Fed is unlikely to raise interest rates at its next meeting on Wednesday, September 20, 2017. In fact, the prognosis for the US economy is that real wages are not growing at a fast-enough pace with falling unemployment data.
The Fed would like to see inflation rising to indicate that prices are rising before it raises interest rates. The next rate hike in the US is expected on December 13, 2017. The Fed has a $4.5 trillion balance sheet which it is looking to unwind by the end of the year. That means that more money will be taken out of circulation and the USD will increase in value. Bear in mind that this will be done gradually so as not to adversely impact the economy.
Falling real money wages have created a bugbear for the US and the UK economy respectively. There are growing concerns in both these economies that credit utilization levels are too high. Recently, the value of transactions on US credit cards exceeded $1 trillion, for the first time in history. This is a worrying trend, given that an economic slowdown typically accelerates the default rate of payments on credit cards, and lines of credit. The spectre of increasing interest rates in Europe, or the US does not bode well for consumers with elevated levels of debt.
US debt is comprised largely of mortgage debt, automobile loans, credit card loans, student loans, personal loans, and other loans. By far the biggest component of bad debt is credit card debt. Various options are available to customers in the US and the UK, such as debt consolidation loans. These options consolidate (group together) all debt into a single loan that is available at a lower interest rate. Debt consolidation differs from debt management, debt mitigation, or debt relief in that it is a line of credit designed to take care of debt in its entirety.