Sunday , 16 December 2018


2018 Could Possibly See 4 Different Financial Disasters

It is almost certain that we will get some kind of financial crasheconomic-train-wreck in 2018, maybe two or even three of them. However, the resilience of the real sector of the U.S. economy should prove sufficient to overcome them, at least in the short term. [Let me explain.]

The original article has been edited here for length (…) and clarity ([ ]) by munKNEE.com to provide a fast & easy read.

2018…has the potential for no less than four kinds of financial disaster:

  1. a major “fringe market” crash in crypto-currencies with credit implications,
  2. a stock market crash of the old-fashioned kind,
  3. a massive bond market crash as yields return to reality
  4. and a recession, which Trump-haters no doubt hope will be deep and long

yet history shows that the four types of disaster need not be connected, and not all need occur simultaneously. For us as investors and participants in the economy, that should be a huge relief.

Likelihood of A Crypto-Currency Crash

The crypto-currency bust is the likeliest to occur in 2018

  • This event is unlikely before the total value of all crypto-currencies exceeds $1 trillion (that total value is already above $750 billion and climbing very rapidly indeed).
  • Furthermore, the reduction in Bitcoin dominance…of the total crypto-currency pool is down to 33% from the 62% at which it stood when Bitcoin briefly topped $20,000. I regard this a healthy sign of the market’s maturing.
  • Bitcoin, while the “first mover” is, by the standards of the best crypto-currencies, very clunky in its blockchain and nowhere near anonymous enough…
  • Big money and Wall Street…have been very late to this game…and are only now piling in when the market, speaking logarithmically at least, must be far closer to the top than the bottom. There are no more 2000% gains to be had here; instead, there is a crisis of illiquidity coming, doubtless accompanied by discoveries of excess leverage, in which the usual dozy and dishonest Wall Street titans will participate fully. This time Wall Street, not the general public, will turn out to be the suckers who discovered the market late.

The timing of the cryptocurrency crash and its importance depend on how big the bubble becomes and how much Wall Street money and leverage are sucked into the vortex…The bubble has inflated from $150 billion to $750 billion in the last five months, and seems to be accelerating, but it is difficult to imagine it extending into 2019. We can thus assign say a 95% probability to a crypto-currency crash in 2018, with the size and damage of the crash depending on how big the bubble has become before it bursts.

…Their volatility is extreme, and their crash will doubtless be extreme, in terms of their temporary loss in value – perhaps 80-90% of their peak – but they are a permanent and valuable part of the financial system.

Likelihood of a Bond or Stock Market Crash

I can go either way on the question of whether the bond market or the stock market are more likely to collapse in 2018; they are probably both about 50-50 to do so.

The bond market, first,

  • is being steadily undermined by the Fed’s slow increase in short-term interest rates, as well as by the stirrings in U.S. inflation, which is, at last, being pushed by labor shortages in some cities. Judging by past patterns, investors will wake up to this reality suddenly, causing prices to collapse and yields to soar.
  • In addition, the last decade has seen massive junk bond issuance, mostly for projects that should never have come into existence. This has been the principal mechanism by which malinvestment has been created and productivity growth destroyed. At some point, this pile of rubbish will have to collapse.

Of all the bubbles blown through the Fed’s policies during the last decade, this will be the most damaging when it bursts, because of its size and scope; it is very likely to cause a recession all on its own. Whether this will happen in 2018 is essentially unknowable; only the exceptional strength of the Trump economy makes it perhaps less likely to occur, as some malinvestment finally, unexpectedly, comes good.

The U.S. stock market

  • is more overvalued than it was in 1999, by most measures.
  • but it will benefit in 2018 from
    • the Trump tax cut,
    • the profit increasing potential of growth that is rapid by historical standards, and fro
    • the blissful if probably temporary release from the nightmare of Obamaist overregulation.
  • Equally, all these factors have already become apparent in 2017, during which the market has risen by some 25%. Thus, there is probably not much further to go…As the late 1990s showed, however, investor euphoria and over-loose monetary policies can cause the market to continue rising for an unexpectedly long period.

Accordingly, I would put the probability of a stock market crash in 2018 as only about 50-50, about the same probability as for a bond market crash…

The U.S. Economy

Finally, there is the U.S. economy itself, now about to enter the tenth year of what was until recently an extraordinarily anemic economic “recovery.” Unlike for the first three potential crashes, the augurs here are excellent; indeed if the stock and bond markets were not in such crazy shape I would put the probability of a 2018 recession at about 1%.

  • Productivity growth, after nearly a decade of stagnation, has reawakened, as the effects of eight years of crazed regulation and crazed monetary policy begin to wear off. There is likely to be some scope for catch-up here.
  • Then there is the corporate tax cut, which should, itself, boost economic activity in the domestic U.S. economy, as well as bringing the chronic U.S. balance of payments deficit back towards balance.

I would put the median estimate of GDP growth in 2018 at 4% or even 5%, as the U.S. economy returns towards its non-mismanaged potential. This, in turn, will help the budget deficit figures, though probably not enough to solve the long-term U.S. budget problem – that requires Presidential and Congressional self-discipline that are sadly absent.

With potential crypto-currency, bond and stock market crashes, one would think the probability of a recession starting in 2018 would be high. However, the exceptional buoyancy of the U.S. economy may prove able to overcome even these headwinds. I would thus put the probability of recession beginning in 2018 at only 25%, although the probability of recession beginning in 2019 or 2020 must be considerably higher. Still, even in the latter case, if policy remains sensible, the recession need not be deep or prolonged, with continued vigorous productivity growth putting the country back clearly on the road to growth by the 2020 election. Whether that will be enough to guard against a return to Obamaism or worse must, however, be doubtful, although the electorate will be much to blame if it isn’t.

Conclusion

It is almost certain that we will get some kind of financial crash in 2018, maybe two or even three of them. However, the resilience of the real sector of the U.S. economy should prove sufficient to overcome them, at least in the short term.

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