There May Be Trouble Ahead....

After an August of family vacations, family reunions and preparing for our big move to Europe, the clarion call of ‘Back to School’ now races across what’s left of the airwaves and print media, calling me back to the sad, calcified world of Trump, Mueller and Brexit.  The air outside blows warm and sultry, a reminder that we are still in the midst of hurricane season, despite the reappearance pumpkin spice lattes and the first promotions of Hallowe’en candy.

As anyone who has travelled to a hurricane inflicted area, Florida, the Southern Coast of the US or even Hawaii, the idea that there may be a monstrous storm over the horizon seems preposterous.  In hurricane season the sun is usually blazing, the warm water is gently lapping, there is a often a cool refreshing breeze in the air.  It is a perfect tropical/sub-tropical day.  How can such wonder be intruded upon?  Yet, just out of sight (and out of mind?), clouds are gathering, air pressure is falling, a cyclone starts to swirl and with it the threat of twenty foot plus swells, storm surges, winds of fury and lashing, torrential rain. 

Well, in all the hype of (near) record levels on the Dow Jones, the NASDAQ and S&P 500, and the braggadocio of President Trump (best economy EVER!)  I see reminisces of that bright summer’s day sitting on a beach in Florida or Kauai looking at the lapping waves and thinking… how can this change?  

But there are signs.  Portents if you will.  

 

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The economy as we all know (from experience if nothing else) is cyclical.  Just as wind shear and ocean temperature can predict storms, there are similar predictors of economic peril.  One particular predictor is causing concern:  Bond Yield Inversion.

Government Bond Yields in both the US and Canada are heading towards inversion territory.  Normally, long-term government bonds demand a higher interest rate than short-term ones. This makes sense, the uncertainty of the long-term demands a higher interest rate.  Inversion happens when the interest rates on short-term bonds are higher than those of long-term bonds.  A “mercury retrograde” for the economy.  The inversion is a great predictor for economic slow-down and recession, one has occurred before every recession for the last forty years.  We aren’t at the inversion point yet, but we are very, very close.  Ripples in air streams and isolated thunderstorms around the Azures are coagulating and beginning to barrel across the Atlantic.  Thar be hurricanes!

We are overdue a recession.  The Great Recession officially ended in June 2009, since then the economy has essentially recovered, at least as judged from the headline figures.  In the US this is now the second longest period of economic growth since records began in 1785.  Reflecting this prosperity, both inflation, albeit slowly, from their historic lows.  

To counter the effects of inflationary pressure, interest rates are slowly beginning to rise from truly historic lows.  That action, though dampening economic growth, feels like the equivalent of the feds boarding up the windows in preparation for the storm.  Giving themselves enough wiggle room to have something to play with should the economic walls come tumbling down and interest rates have to be cut again.

The big problem is that the largesse present in the current period of US and Canadian economic prosperity has not been spread evenly.  Average wages are still stagnating and have only just recovered to their 2007 rates.  Household debt has exploded, with nervous eyes turning to those interest rate rises I mentioned.  Even R&D which has somewhat flatlined, at least in the west.  

We aren’t innovating.  Most of us aren’t growing richer.

All in all, it feels a bit like the wrong type of recovery.  A decade of prosperity has been lost for most of the 99%, despite near those record employment levels.  So, rather than a recovery that invested in people and innovation.  A recovery that built the economy up for all.  We got a trickle-down recovery that through a mixture of tax cuts, private sector bailouts, private sector stimulus and Quantitative Easing of money supply, encouraged corporate hoarding of immense profits, partly created by automation and off-shoring, which has led to vast rewards for executives and shareholders.  As we surely must have learnt by now the wealth never trickles down, it seeps out, suppurating into tax havens and secret bank accounts.

What has shifted in the economy to such a huge degree that the normal economic equilibrium has been overturned?  People speak of the demise of Unions and collective bargaining or automation and the gig economy, but surely these things alone cannot explain the ongoing denigration of the laws of supply and demand, as encapsulated in the current situation of low unemployment and virtually zero wage growth in real terms?  

The psychology of both employers and employees along with perceived economic uncertainty has certainly played a part, as has the continued squeeze of public sector wages.  In Ontario one of Doug Ford’s first act was to freeze pay rises for Managers and Executives in the Ontario Public sector, claiming profligate spending.  The UK Public Sector has suffered a similar fate, with both enforced austerity and Brexit uncertainty being blamed.  Trump last week, in a breathtaking display of hypocrisy, announced he wanted a pay freeze for federal workers to help with the Government’s fiscal rectitude - this of course after the eye-watering tax cut to business, that, despite assurance from the GOP, has NOT been passed on to the workers.

This is leading to calls on both sides of the Atlantic for a realignment of Capitalism.  Elizabeth Warren is making a case for new economic thinking in the US ahead of an expected Presidential run.  In the UK the IPPR has just issued a report on prosperity and justice that is being seized upon by British left, including followers of Jeremy Corbyn .  Neither Justin Trudeau or Macron in France have biten, yet, but both might be the tempted if the ability to squeeze the progressive vote might offset challenges from the right.  Jagmeet Singh and Jean-Luc Melenchon should both beware.

Capitalism has a way of blunting its most brutal edges in the face of mighty catastrophes.  You only have to see the gains of the welfare state that followed the World War II.  That habit of humanization appears to have been forgotten in this latest 'greed is good' iteration.  If such policies are not remembered and followed, I fear that the explosion of national/regional populism we saw with the Election of Trump, Doug Ford and the Brexit Victory might just be the start.

If that is the case, we all might be left facing the music... but today, the weather was beautiful.  Moonlight, love and romance... are mostly cheap to pursue and as always priceless to enjoy.  Let dance and the audacity of hope reign!