Muphy’s Other Law: What could Possibly Go Wrong?
By John Rothans, Chief Numismatist @ U.S. Money Reserve
The famous American adage that warns us, “Anything that can go wrong will go wrong” is a cherished reminder to always be prepared for the worst. Murphy’s Law dates back to World War II and was apparently coined by an engineer conducting deceleration studies at Edwards Air Force base in California. Edward Murphy was researching the impact of g-forces on the human body to determine how much extreme gravitational force a pilot could withstand in a crash. There was little room for error. So when the “strain gauges” on a rocket-propelled simulator were wired backward, the concept of Murphy’s Law was born. The idea has provided sound wisdom to generations of Americans ever since.
The U.S. economy has seemed rocket-propelled in recent years. Economic growth hit a brisk 3.2% in the third quarter of last year. That’s the fastest growth rate since 2014. In the fourth quarter of 2017, the economy grew another solid 2.9%. The unemployment rate is at the lowest level in 18 years. We’ve experienced over seven years of job growth, and paychecks are slowly increasing. Likewise, consumer confidence is at its highest since the dawn of the new millennium.
In a survey of small companies, The National Federation of Independent Business found that 32% believe this is a “a good time to expand.” That’s a record high and triple the response from late 2016. In addition, the President’s tax overhaul has slashed corporate tax rates, an extremely popular move among business leaders, and some evidence shows that money is “trickling down” to workers, resulting in better raises, bigger bonuses, and — as in the case of McDonald’s — an increase in employee tuition benefits.
So what could possibly go wrong?
A trade war, for one. Last month President Trump announced a 25% tariff on imports of steel and a 10% tariff on imports of aluminum. China responded by announcing its own tariffs on 128 U.S. goods, including a 25% tariff on pork and a 15% duty on U.S. produce like soybeans, nuts, and fruit, as well as wine and metal products. China is a vast market for American almonds, pistachios, pecans, and walnuts predominantly coming out of California and Arizona. Trump has responded by threatening up to $60 billion in new tariffs on select Chinese products. Alas, a trade war has been born — and it has the potential to not only disrupt global commerce but also to trigger price increases and job losses at home.
Trade wars make investors nervous, but big pullbacks in tech stocks make them downright panicky. FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) propelled Wall Street to record levels last year, driving 24% of all gains in the S&P 500. But Facebook’s privacy breaches and Amazon’s purported tax dodging have caused major indices to move in and out of correction over the past few weeks. Clearly this has the potential to spark a broader sell-off and even usher in a protracted bear market. FAANG stocks have lost some $397 billion in market capitalization since March 12. On Monday, the Dow fell 458 points as the tech-heavy NASDAQ dropped 193 points to put it near correction. And more downsides may be coming as the President continues to take potshots at Amazon for undermining the U.S. postal service and not paying its fair share of taxes.
In addition to a trade war and a major market sell-off, what else could possibly go wrong? How about a full-blown economic downturn? The economic expansion will turn nine this year, and a growing number of analysts now believe that we’re in the late stages of the recovery. In other words, a bust is inevitable. There are mixed opinions about the precise timing of the coming downtrend and what will likely trigger it. Everything from higher interest rates to rising inflation and slowing growth has been mentioned. And debt is on everyone’s list.
The U.S. is now more than $21 trillion in debt. In February, President Trump signed a debt-limit suspension that effectively switches off the debt ceiling and permits unchecked federal borrowing until March of next year. We can expect greater budget shortfalls and much wider deficits. Last month, the President signed a monstrous $1.3 trillion spending bill that increases federal spending by $400 billion dollars over the next two years, creating an unsustainable debt trajectory. Make no mistake, a debt-fueled economic downturn would be particularly severe.
Interestingly, Murphy’s Law has an addendum: “Anything that can go wrong, will — at the worst possible moment.” In the case of the U.S. economy, that time may be right now. Americans are over-leveraged in stocks and have become “comfortably numb” with respect to an impending economic slump. Despite the spate of recent warnings, corrections, and sell-offs, a sense of blind optimism persists. Call it cognitive dissonance, irrational exuberance, or the Pollyanna principle. But in the case of the U.S economy, the major thing to fear in 2018 is the complete lack of fear itself.