My Biggest Risk in 2019 – Dysfunctional U.S. Government
Markets around the world have rebounded and recovered about half of the loss from the prior few months. The technical picture looks like a “V” type of recovery which started with a 20% correction, followed by a sharp 10% bounce. Liquidity also returned to bond markets which recovered with the lowest quality High Yield bonds and Bank Loans leading the way. The market crash in December was no surprise to investors after the onslaught of selling in October and November. It was the extent of the sell-off, which was stunning. It was the worst quarter of returns since the Great Depression!
Most of the 2019 market outlooks warned about the ongoing trade war with China, aggressive Fed tightening, and a material global growth slowdown. I’m less concerned about these risks and more concerned about the dysfunctional U.S. Government.
President Trump will likely reach some form of a trade agreement with China. The Federal Reserve is not going to raise rates this year. And the risks of a material global slowdown in China and Europe are already well known. The biggest portfolio risk going forward might be the U.S. Government. This risk has been building over the years and seems about to erupt.
This week Federal Reserve Chairman Jerome Powell said that he is very worried about the deficit, but it’s a long-term issue that we definitely need to face, and ultimately, will have no choice but to face it. This risk was echoed by DoubleLine Capital CEO’s Jeffrey Gundlach, but not on the long-term time horizon. In his 2019 outlook, he believes that this year might mark the time when investors wake up to this risk and the bond markets will reckon with the rising federal deficit. He said the exploding national debt and liabilities involving pension funds, state and local government governments and Social Security have reached a stage that is “totally unthinkable.”
As we approach the longest government shutdown in history, I believe we are at a stalemate. It’s horrible that 800,000 federal unpaid workers find themselves in the middle of this fight. I wrote a few weeks ago that the stock market would not be focused on the shut-down and it has been up 8% during this time. We are now in uncharted territory and if this government shutdown continues much longer, volatility could return and markets might force a compromise if this impasse continues.
Investors have become more frustrated with politicians inability to compromise or come up with any solutions. Even though the market is more focused on the news about the upcoming trade deal or changes in interest rates, it might end up being the dysfunction of the U.S. Government that will be to blame if the U.S. economy begins to slow.
Please read our disclosure statement regarding the contents of this post and our website as a whole.
