As 2017 draws to a close, we’re facing at least three key economic certainties going into 2018. The first is that the market is clearly in a boom cycle. The S&P 500 is on a 12-month winning streak. Year to date it’s up over 18%. The Dow is up over 4,500 points since January. Year to date that’s an increase of 23%. The NASDAQ, with its heavily weighted tech mix, leads all indexes and is up over 27% on the year.
But as stock records continue to be shattered, there are growing whispers that we’re quickly approaching a market top. Are we perhaps now flying too close to the sun? Like Icarus, we seem to be ignoring repeated warnings that our wings could, in fact, melt—loosening the feathers and ultimately sending us plummeting into the sea.
The other economic certainty is that the U.S. dollar is under fire and will remain so through next year. With low-inflation worries, a surging euro, dysfunction in Washington, and China and Russia hell-bent on bypassing the buck in the global monetary system, expect the dollar to be under continued pressure. Even Venezuela has started publishing oil and fuel prices in Chinese currency in an effort to break free from what President Maduro calls “the tyranny of the dollar.”
But we don’t have to go all that far afield to find dollar-debasing schemes. President Trump actually favors a weaker dollar, which would make U.S. goods cheaper to foreign buyers and boost exports—much to the delight of U.S manufacturers, corporations, and tourism. A weak dollar, however, will also mean a jump in consumer prices, particularly for imported goods and fuel. It can also lead to rising inflation.
Lastly, we will most certainly drag our massive debt mountain into 2018. Among Janet Yellen’s final warnings at the Joint Economic Committee hearing last month is that the national debt should “keep people awake at night.” Yellen admitted that she remains “very worried about the sustainability of the U.S. debt trajectory.”
James Pethokoukis, a blogger at the American Enterprise Institute, asserts that “America’s national debt will never, ever go down!” He maintains that “Washington simply doesn’t care about cutting the debt burden” and that “both parties are preparing to run an economic experiment on the world’s largest and most advanced economy.”
At the end of the 20th century, the public debt of the United States stood at $5.67 trillion. Today it is almost $20.6 trillion—an increase of almost $15 trillion in 17 years. The majority of it (over $10 trillion) was added since the financial crisis of 2008 with the combined price tags of Hurricane Katrina, the American Recovery and Reinvestment Act, tax cuts, and Quantitative Easing.
So with or without tax reform, with or without immigration, healthcare, or financial reform—the national debt is with us for the long haul. The consequences of excessive federal debt include possible cuts in government spending; higher interest payments; losses for pension funds, mutual funds, and banks (and anyone else holding federal debt); a greater risk of fiscal crisis; and limitations on the Fed’s ability to respond to any new crisis.
As we approach 2018, it would be wise to prepare for these economic realities by diversifying against a shift in the boom-and-bust cycle, hedging against a weakening dollar, and safeguarding our assets against the growing national debt pile.
We should also ask ourselves a few critical questions: 1) How much higher can Wall Street realistically go? 2) How long will the decentralized bitcoin bubble last? 3) How many more rate hikes will there really be in 2018 with inflation at historic lows? 4) And when could gold ever be a bargain again?