“I think in 2015 we’ll have our first correction.” — Jeremy Siegel on CNBC
With the collapse in oil prices (down 40% in the past two months) and energy service stocks, Wall Street has sold off again. Although it’s too early to tell when the next correction hits the stock market, it could happen at any time in 2015.
The stock market has had a great run since the financial crisis and Great Recession of 2008-09, with most of the Fed’s easy money going into stocks and bonds rather than growing businesses. Stocks have enjoyed one of the biggest runs in history during 2009-2014, more than doubling in value.
After five years of double-digit percentage profits on Wall Street, a correction is due, and I would not be surprised to see it happen in 2015.
What could trigger it?
First, Fed policy could subtly shift by raising short-term rates, or by slowing the money supply (M2). With quantitative easing completed, the monetary base is in steep decline and M2 is growing at reduced pace. If that trend continues, we could see a slowdown in the economy and a sell-off in stocks.
Second, while the 40% plunge in oil prices is positive for transportation companies, manufacturers, auto retailers and most other companies, the shakeout could be difficult in the short term. Billions of dollars of oil infrastructure plans are being delayed or cancelled, hurting a lot of businesses.
Third, emerging markets are slowing down. The fall in oil prices is not just due to expanding supplies, but weaker energy demand around the world. Weaker global economic growth, especially in China, could be devastating in 2015.
Is China Headed for Trouble in 2015?
Barron’s published an interview in the December 8, 2014, issue, “Why Beijing’s Troubles Could Get a Lot Worse,” with Anne Stevenson-Yang, co-founder of J Capital Research and long-time expert on China. She pointed to serious problems developing in China that might erupt soon and cause a worldwide panic. To quote her:
“As for the recent IMF report calling China the world’s biggest economy on a purchasing-power-parity basis, how silly was that? China is a cheap place to live if one is willing to eat rice, cabbage, and pork, but it’s expensive as all get out once you factor in the cost of decent housing, a car, and health care.”
Then she added, “Property sales are in decline, steel production is falling, commercial long and short-term vehicle sales are continuing to implode, and much of the growth in GDP is coming from huge rises in inventories across the economy.”
She also points to building “airports with no commercial flights, highways to nowhere, and stadiums with no teams.” She says there are “empty towers and ghost cities.”
I asked my favorite Asia expert, Keith Fitz-Gerald, editor of the prestigious Money Map Report, about China and he’s not as pessimistic. Yes, he admits that China’s growth is slowing, but the domestic market is strong, and the capital growth there is “staggering.” He thinks the Chinese are determined to make the yuan replace the dollar as the world’s currency.
Keith is planning to speak at FreedomFest, “the only conference I will be speaking at in 2015”! As Keith said, “FreedomFest is the only conference that even speakers like to attend!”
You Blew It! Bush 41, A Man of Character?
“Read my lips, no new taxes!”
— George H. W. Bush, 1988 Republican National Convention
Two bestselling books have been published recently on George Herbert Walker Bush, the 41st president of the United States, both arguing that Bush Sr. was a wise man of character, a war veteran, a former congressman, CIA director, vice president and president who served his country well. He deserves to be admired, they say.
Yet I can never forget his reneging on his pledge made at the 1988 Republican National Convention, “Read my lips, no new taxes.” We are all used to politicians lying and taking back their pledges after getting elected, but this one was especially galling when he used the term “read my lips.” It was like a handshake, where a man’s word is his bond.
In his book, “George H. W. Bush: Character at the Core,” speechwriter Curt Smith addresses the issue straight on and says that Bush Sr. agonized over the decision to raise the income tax rate from 28% to 31% in 1990, but ultimately he caved in “for the good of the country” because otherwise he would have had to cut government spending dramatically.
Yet let’s read the context of Bush Sr.’s 1988 speech, ghostwritten by Peggy Noonan:
“And I’m the one who will not raise taxes. My opponent now says he’ll raise them as a last resort, or a third resort. But when a politician talks like that, you know that’s one resort he’ll be checking into. My opponent won’t rule out raising taxes. But I will. And the Congress will push me to raise taxes and I’ll say no. And they’ll push, and I’ll say no, and they’ll push again, and I’ll say, to them, ‘Read my lips: no new taxes.’”
Clearly, this is more than a throwaway line. It is the most memorable statement Bush Sr. ever made. And a year later he violated it without much remorse. He didn’t have to do it. He could have cut spending, or run a larger deficit. But he didn’t have to violate a solemn pledge.
You can call Bush a lot of things — a kind man, a patriot, a veteran, a devoted public servant, a good father — but above all he was a politician, not a statesman who was as good as his word.
In case you missed it, I encourage you to read my e-letter column from last week on Eagle Daily Investor comparing how gross output and gross domestic product measure U.S. economic growth differently. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
Good investing, AEIOU,
Presidential Fellow, Chapman University
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