by Viraj Shah
Amidst markets soaring high and the unemployment rates at 4.6%, there is ample fuel to the fire of an imminent economic crash in 2017. While the Trumphoria is still trying to hold the stock market, it is highly likely that a few factors will leave the Americans with little money and close to zero emergency funds. There is a high chance that the 9-year bull market run will finally give in and the stocks could come crashing down. Here are the top 3 catalysts that could call a US economy collapse this year.
- Rising Household Debt
The infamous ‘D’ word is making a slow and steady entry into the American household again. After the crash of 2008, the government has tried to ensure that such an event does not happen again. However, this time, America is $20 trillion deep in national debt. An average household is not just struggling against rising credit card debts but is now under severe pressure of student loans as well. The student loans are at an all-time high today, even surpassing credit card debts. The average household debt has increased to $132,529, an 11% rise in the past decade.
The household income has increased by merely 28% while the cost of living has gone up by 30%. Most Americans do not have an emergency fund and are still recovering from the 2008 setback. While the Feds have raised interest rates, Americans who are already struggling with high living costs and debts, will likely face a harder time. Consumer spending will go down and the US economy, which is 70% reliant on consumer spending, will likely see a downward trend.
- Americans Not In Workforce Rise
While the official figure of unemployment is at pleasing 4.6%, the truth behind this number is scary. The number of Americans not in the workforce has risen significantly and participation rates remain lower than 63% as of November, 2016. Most of the jobs created during this period were part-time or unskilled jobs. The requirement for waiting staff is rising but skilled and full-time jobs are not being created at an equally high rate. An average American college graduate with tumultuous student loans could be working part-time in a minimum wage setup which brings no good news to the economy.
A similar fate awaits the official inflation numbers as well. Prices went up by 1.7% in November, 2016. The Chapwood Index, a non-government inflation index shows bothering numbers for the citizens. While the inflation rate is reaching double-digits (10%) in cities like New York, San Francisco, Los Angeles, and Seattle, it is raging at 7.5% in traditionally low inflation rate locations like Wichita and Colorado Springs. Add unemployment, underemployment, and rising debt and a 2017 doom seems evident.
- Stocks are inflated, albeit artificially
While there are many reasons for the stocks to rally and soar higher in the last quarter of 2017, the fact that stocks are overvalued cannot be denied. The S&P 500 has shown a 10% rebound while Russell 2000 Small Cap Index rose by 20%. Even the Dow Jones Industrial Average was up by 13.5%. While these numbers are clearly amazing, the story behind them isn’t.
Investors chose the stock market because bonds and other securities were nearing a zero return. This means that the stock market rise is not a result of a real growth in the economy. In fact, the S&P is overvalued by 73% per the Case-Schiller CAPE/PE Ratio.
Warren Buffet considers the Market-Cap-to-ratio the best indicator of valuation. This ratio is currently 126.9%. It is to be noted that the more numbers you add over 100, the more inflated the valuation of the stocks. Before the 2009 financial crisis, the ratio was only 108% but it was a staggering 129.7% in 2015.
In a low-income environment, investors are still pouring money to the stocks. Investors are pinning in $27.80 for every $1 a company earns. However, higher interest rates would typically mean a lower preference for the stocks. With no jobs and a GDP growth of 2%, overvalued stocks may mean problems for the economy.
Going by the way Debt is rising along with protectionism from America; it is fair to say that coming days are going to be tough. Stock market bubble is another thing which investors are staring at.