While last week’s market plunge was a shock to the system, it was only mildly surprising. The global economy seems to be hanging on by a string. The energy sector is depressed. China suffers from over-investment, the devaluing of its currency, corruption and a potential real estate bubble. Japan’s economy is in decline, and Europe’s finance ministers look like a bunch of guys who don’t know how to swim, grabbing for each other in the deep end. Investment into developing nations such as Brazil, Turkey and Russia has slowed. [i]In the U.S., growth is pedestrian at best.

Is it time to face the reality that global prosperity is a myth? At home in the U.S., the Federal government is running out of ammo.  While pundits argue when the Fed will raise rates, it is only a matter of timing and degree.  Recent indications by Fed Governors are that the Funds Rate target in 2017 will be between 3.5%-4.0% (it is currently .25).  [ii]  In other words, rates are not just going to be higher, but much higher.

High government debt and the likelihood of escalating deficits (to cover the burden of a burgeoning baby boomer population) translate into less fiscal stimulus to combat future recessions.  While the U.S. is not threatened by a recession in the short term, the ability of the Fed to manipulate growth through monitory policy is waning. [iii]

U.S. GNP (Gross National Product) is calculated based on consumption, investment, government spending and exports (- imports).[iv] With government spending in decline, a strong Dollar (versus a week Yuan), and weak investment, the writing is on the wall for an extended period of tepid growth. As an economy, we are overly reliant on consumption. With commodity prices dropping, inflation is in check.

I am not suggesting we should all cry in our beer.  The U.S. is still the greatest economy in the world and ripe with opportunity for entrepreneurship and investment.  There will be a flight to safety (to the U.S. for some time).  I am suggesting that global demand and monetary policy will not create artificial growth.

Capital projects will be harder to finance in the future (better invest now while the getting is good). Being a market taker in this environment will provide lackluster market returns as entire industries continue their race to the bottom (commoditization).  Currency exchange risk will remain very high.

In a world where organic growth is hard to come by, companies will have to continue to innovate and find efficient ways to develop new products and services. Necessity is the mother of invention, and it is the development of new technologies that will continue to be the driving force of U.S. prosperity.

Enjoy the party while it lasts.

 

[i] Growth Fears Send Stocks Into a Skid by Strumpf and Cui 8/20 WSJ

[ii] The dots signal rate hikes are coming this year Andy Kiersz, Business Insider

[iii] U.S. Lacks Ammo for Next Economic Crisis. Hilsenrath and Timeraous 8/17 WSJ

[iv] Gross Domestic Product – Wikipedia