Thoughts from our recent Big Picture podcast, "Outlook Q4 2015: Deflation & The New Normal – A 360 Degree View," which can be listened to in full on the Newshour podcast page here or on iTunes here.
In a recent broadcast, Jim Puplava outlined a mix of positives and negatives impacting the markets. Acknowledging weakness in the emerging world, Jim still sees no recession next year for the United States. However, markets need clarity on a number of issues, ranging from Fed monetary policy to concerns about a global slowdown, before they can mount a sustained move higher.
Discussing the third wave of a global financial crisis that began eight years ago, Puplava notes how many emerging market economies are now in contraction and that “capital is moving away from the periphery and back toward places like the US and Europe.” US debt in particular will become more attractive with the prospect of higher rates in the years ahead.
“I just don’t see a recession next year…housing looks good, auto sales remain strong, and retail sales have held up which is why we are doing a lot better than the rest of the world,” said Puplava.
US jobless claims and other leading economic indicators are also not warning of a US recession. The Conference Board's Leading Economic Index has reliably warned of every recession for the past 50 years. Currently, it shows that leading economic indicators for the US have moderated but are still positive and well above the point of contracting, which typically happens before the onset of recession and major bear market.
Source: Bloomberg
On the other hand, Jim points out that he also doesn’t see an inflationary scenario developing in the near future and that disinflation or deflation is more likely in a slow growth environment. Even in the US, “we are lucky if we hit 2% growth rates...this is not a booming economy.” Unimpressive growth at home coupled with slowing Asian economies means “we do not have economic momentum.” It is therefore unlikely that the Fed hikes rates until well into next year.
When the Fed eventually does raise rates, though, Puplava sees a bright future for the US economy: “asset classes will rally and lending should increase as the yield curve steepens.” Once the Fed begins to raise rates, “it should bring a little more clarity to the equity markets, something markets enjoy.” Puplava then points to the history of Fed increases and says that stock market returns have typically increased after an initial disruption.
An important caveat to the good news comes from the lack of fiscal discipline in Washington, however. While the markets may like gridlock on some issues, the looming shortfalls in popular entitlement programs demand a seriousness not seen among most politicians.
With President Obama having doubled the national debt during his time in office, his party sees no trouble in offering all sorts of things to Americans, ranging from free college, higher minimum wages, more health care, increases in social security, corporate profit sharing, more food stamps, and finally, more taxes that will supposedly only affect the “rich.”
Jim then reminds listeners what some politicians think of as rich: ,000 a year for single taxpayers and 0,000 a year for couples. These are the income brackets that will be hit with medicare increases of 52% starting this year—assuming they have not yet filed for social security.
By 2019, many of the so-called rich could see their Medicare Part B premiums increase by more than 100%, as an earlier freeze on those premiums is allowed to expire. The lesson for investors is clear to Puplava: “there are just not enough rich people to pay for everything…you are going to have to go for other people and it's mainly the middle class.”
Speaking of another industry where the government is at least partially involved, higher education, Jim reminds people how “the availability of cheap money and credit to finance education coupled with monopolistic conditions are one reason why education costs have gone up two times the regular inflation rate” since the 1970s.
In the end, Jim stresses repeatedly that there is “no such thing as a free lunch” and that when Congress or politicians “use the words ‘reform,’ ‘modernization’, or ‘free’ they are really talking about raising your taxes—either directly or through inflation.”
Listen to this full broadcast with Jim Puplava, President and Chief Investment Strategist at PFS Group, by clicking here. For a complete archive of our broadcasts and podcast interviews on finance, economics, and the market, visit our Newshour page here or iTunes page here. Subscribe to our weekly premium podcast by clicking here.
