2019 Economic Risks
Mike Dunn | MutualFundDirectory.org | Copyright 2018
YTD GDP Growth in 2018
The US GDP is currently growing. According to the US Bureau of Economic Analysis (BEA) the GDP growth rate in the first quarter of 2018 was 2.2% annualized but increased to 4.2% annualized in the 2nd quarter. However, there are reasons for concern in the near future for investors and US businesses.
How long can the growth last without significant inflation?
At some point, inflation will be the economic mechanism to slow down the “real” or “net” growth of disposable income for consumers which is a major driver for the GDP. With the markets at near record levels, at this point, it makes sense that there will be a market correction. Is there more growth/alpha to be had in this market. Yes. Is there more risk at these pricing levels and with the inflation threat. Yes.
Tax cuts and US macroeconomic changes
The good news is the tax cuts, and regulatory changes have helped kickstart and fuel the 2017/2018 economic growth. The proposed (pre-election) personal tax cut can help delay the effects of inflation but may bake in more inflation in the future. The resulting net effect of this tax cut is unclear. Will the benefit of the tax cut exceed the inflation increase on the disposable income and GDP?
Retail sales are off in September
Only 0.1% retail growth in September of 2018. “Advance estimates of U.S. retail and food services sales for September 2018, adjusted for seasonal variation and holiday and trading‐day differences, but not for price changes, were $509.0 billion, an increase of 0.1 percent from the previous month, and 4.7 percent above September 2017”, per the Census Bureau on 10/15/18. This information would be a mitigating factor for inflation.
HyperInflation in several countries
Hyperinflation in Venezuela and some Africain Counties is still a growing issue. Can this economic situation spread to neighboring counties? It is a possibility. Economic instability means political instability.
The US vs. Global Inflation
Hyperinflation can still affect the US economy and economies of the rest of the world. However, one of the biggest under-reported inflationary triggers that I see is the increased cost of silicon chips and the Microsoft 10% – 25% cost increase. The announced price increase for 2019 is 10%. However, it appears from closer analysis some costs are nearer to a 25% increase. All these costs will be passed down to the end users/consumers via higher prices.
Cost of Capital with Inflation
Nearly all companies have refinanced their existing debt at the historically low rates. However, new projects will have a higher bar for profitability with the higher interest rates due to inflation. Expansion or continuing operational levels into countries and the inherent political instability with current hyper-inflation will need to constantly reevaluated. Inflation hurts individuals on fixed incomes, people sitting on some non-liquid investments, and the bond market. Plus, inflation hurts the people wanting to purchase homes and durable goods by raising the financed costs.
Unforeseen Geo-political surprises in 2019
Tensions are higher than normal between the major world military powers. A minor or major military conflict with China in the China Sea’s sea lanes, with North Korea, with Iran, or in Israel could happen will cause a major sell-off. In addition, when the first drone attack happens will be a life-style game-changer and the skittish markets will tumble as they recalculate for a new paradigm. Be prepared.
If the economy slows in 2019, that may be a blessing in disguise. Current inflationary pressures abound with a GDP above 4%. However, the 0.01% retail sales growth may be a silver lining concerning inflation and the FED raising in the interest rates at an increasing amount. Moreover, for these reasons, there is a real chance of a correction in 2019.