By Albert Lu
“We are uncomfortably close to recession” is how James Rickards recently explained the situation to me at the NASDAQ MarketSite in New York.
“It’s not determinative, but it appears the bull market is over.”
Indeed, it does.
Despite a blow-out first quarter, the Dow Jones Industrial Average remains below its 2018 high. According to Rickards, this “triple-top” and the emergence of the inverted-yield curve together signal the end of the extended bull market.
But stocks are not his biggest concern. Economic growth, or the lack thereof, has become a serious issue, he says.
“We are getting back to the 10-year economic growth trend of 2.23% in real GDP.” This is bad news for a country with $21 trillion of debt and a projected annual deficit in excess of $1 trillion.
With the country’s debt-to-GDP ratio already at 105% and with debt growing faster than GDP, the future looks bleak.
“The country is going broke at that rate of growth.”
Economic studies have indicated that once a country’s debt load exceeds a critical fraction of its GDP, the burden of debt service exceeds any marginal benefit of borrowing. And whether that level is 90%, as suggested by Harvard economists Reinhart and Rogoff, or higher, it seems clear that we are headed in the wrong direction.
So, has the central bank run out of tricks?
“I wouldn’t say they have run out of tricks. But it’s important to know that they are tricks.”