The last couple of days have not been kind and today was worse than yesterday. But, in context it’s not all that bad if you consider where the market was at the beginning of 2020 versus where it is today. All that said I think investors should be extremely cautious right now because sometimes when dominoes start falling the continue on for quite some time.
The problem I see today is that most of the economic “good times” we’ve seen and the bad times have been because of government manipulation of the U.S. economy. Back when President Obama was in office the economy was never allowed to take off. It was artificially held back with monetary and regulatory policy. The goal was to never have a bubble that could pop. What we received was a stagnant economy with stagnant wages where only the largest of corporations and wealthy people doing well. There was no bubble to burst but also a general feeling of dissatisfaction.
Trump popped into office and unleashed the pent up demand for economic activity from Obama’s 8 years in office. The reduction in regulations and tax policy that were more friendly towards business accomplished what President Obama was trying to avoid. The economy took off like a rocket and so did the stock market. But then the manipulation came in to play. At Trump’s direction the Fed reduced interest rates continuously making easier to go into debt. Why use your cash when you can use someone else’s for a few percentage points in interest. Money was nearly free. I believe this is what propelled the stock market to record highs. Yes, the rest of the economy did well and people across the board did better. Wages grew at a pace not seen since after World War II. But Trump played the same game that all past Presidents did. He spent taxpayer dollars as if it were going out of style. He increased the country’s debt on a massive scale and while the pace of the growing economy could handle the problems it can only handle it as long as it’s growing.
Move on to COVID-19. World economic manipulation at a scale never seen before in this history of mankind. Almost all small business were shut down. Large multi-national corporations thrived like never before. Trump, feeling the pressure of re-election, followed the wrong people into the battle with the pandemic. He allowed health policy to dictate economic policy and the American economy is all built on risk. The only way to mitigate the damage caused by massive numbers of people being suddenly out of work was to print more money. Stimulus as they call it. By the trillions dollars were being handed out to business and individuals. Incomes stayed as high as they could during this circumstance but it was all artificial. There was no real economic activity. What happened is akin to a salesman claiming he has record sales because he bought up all his own product. It was going to be a problem going forward no matter what but was made worse by the 2002 election.
President Biden has set an economic policy that is far more progressive than anyone believed he would implement. With the passage of a $1.9 trillion dollar package and the threat of trillions more for infrastructure and social programs there seems to be no limit to the amount of money the U.S. government is willing to print. If you thought skyrocketing debt was bad before this is going to get far worse. Inflation has reared its ugly head in an aggressive fashion. It’s being talked about more now than I’ve seen in decades. There is proof of inflation right now but it’s largely due to the short term economic steps resulting from the pandemic. I expect this to slow down over the coming months. But, towards the end of this year and all through the next I don’t know if we can be certain that inflation won’t get far worse. Trillions of dollars are created and has to flow somewhere. We have the problem now of too much money in the system and not enough goods and services. High demand and low supply lead to high prices and shortages. This is a direct result of artificial government manipulation.
I think investors are right to get more conservative now with their money. It could be a bumpy ride for several years if not longer.