Eco Update

Hello readers!  Apologies for my lengthy absence - I have been writing a "Good, Bad and Ugly" for WW2 fighter planes, and it has become more involved than originally intended.

Today - the economy!

Here are some basic realities that will drive economic policy for the next decade.

1. The USA is close to broke.  As of right now the US Government owes $19.842 Trillion. The budget deficit is almost $600 Billion a year. They paid $432 Billion in interest on their debt last year, and they pay a remarkably low 2.216% interest on their debt. If interest rates on this debt rose even 1%, this would increase their interest payments to close to $650 Billion a year, which means they would have to come up with an extra $200 Billion just to pay interest on their debt. A 2% rise could force the USA into a debt death spiral requiring massive austerity and tax increases. They can't go there.

We know that rates are set to rise, and so, interest payments on the US debt will also rise, just as Trump promises to spend trillions on infrastructure. Janet Yellen advised Congress yesterday that she thinks the US Fed should let the economy run a bit. TRANSLATION....she thinks that the US Fed should let inflation run ahead of interest rates, which would slowly but surely reduce the real value of the US Government's debt. This would be good for US Government finances in the long run. It will also slowly but surely destroy the value of interest bearing assets such as bonds as it would mean a long-term negative interest rate. Retirees and others who rely on interest-bearing assets for their livelihood who have nowhere to turn, except to accept risks in the equity markets.

2. Business Profits are Declining.  Look at the chart below...

  

There is a direct correlation between rising profits and stock market appreciation. Declines like this almost always lead to significant market pull-backs.

3. US Productivity growth is close to stalled.

Productivity growth in the USA is just about tapped out. This is the underlying driver for economic growth. When it stalls, everything stalls. It stalled.

So what does this mean?

Negative interest rates are certain to drive the price of Gold as it is an asset that will hold its value no matter what. While negative rates should also spark a flight to equities, declining corporate profits are certain to hammer the US equity markets, at least in the short run.

So - short the markets and buy Gold.  Hold.  You will be rewarded.