Economic Crash 2017 and How the Next Financial Crisis Could Be Worse Than 2008 – Lombardi Letter

The Uncertainty That Could Cause an Economic Crash 2017 Has Begun

There is a distinct possibility, if not an actual probability, that the world will soon analyze the causes of the great economic crash 2017 or economic crash 2018. Indeed, the keyword is economic crash. The point is that the next two years are mired in uncertainty. Investors would be wise to review the general causes of economic depression or the Great Depression itself.

No economic depression, stock market crash, or economic collapse are exactly alike. But they share points in common which fall in one of two categories: exuberance or socio-political disruption. Exuberance and socio-political disruption have already stamped their marks this year. Thats why no keen observer could simply dismiss the chance of an economic crash 2017.

The combination of factors is easy enough to identify, but analyzing the various aspects of an economy crash can take decades. For example, determining the causes of the Great Depression of 1929 continues to keep analysts as busy as understanding the causes of the Wall Street crash of 2007/08.

If we had a complete understanding, we might better determine the chance of an economic crash 2017. But we dont because there are still contradictory positions. There are also different ways to interpret the causes of a stock market crash, especially one that leads to economic depression.

The more recent the crash, the more complex and intertwined the causes. The effects are always global, and if theres any difference, for example, between 1929 and 2008, its the speed of the domino effect. One of the keys to understanding the ever more complex system is that no market exists in risk isolation.

That means that the current market includes a substantial amount of risk resulting from the social, political, economic, and financial interplay between the United States, the European Union and the Big Asian economiesincluding the Tigers.

The gloomy outlook had more to do with the economy and the markets than politics. Now, barely two weeks into Donald Trumpspresidency, the Dow Jones is at record highs. But the risk of a total economic collapse and an implosion of the current world order seems almost inevitable.

The Trump policy, mainly focused on infrastructure investments, the recovery of the domestic economy, and tax relief for businesses, could yet have positive effects on the American economy. Economists expect GDP to exceed 2.2% in 2017. There are even those who believe the United States can resume its role as the locomotive of the world economy.

This would certainly benefit from an accommodating monetary policy. But the market is not betting on this now. The Fed seems determined to increase the nominal interest rate. Shy of charging like a bull, last New Years Eve, the realistic trader could have expected an initial rate hike and a subsequent stabilization in the face of predictable but moderate growth.

But that was before Trump played his hand. It was also before the media, and an entire hardly ad-hoc protest machine, revealed itself. Indeed, 2017 promises to be a very interesting year not only from the economic point of view, butand most of allfrom its political developments and repercussions.

So far, Trump has done what no other politician has dared try before. Hes done exactly what he promised during the campaign, diluting or softening none of his radical stances. This has caught pundits by surprise. The chances of the elections in four major European states (Germany, France, Holland, and probably Italy) going to parties espousing Trump-like views has increased.

But how shall these and other events influence the markets and financial investments? More significantly, how will these events spark a stock market crash of such proportions as to leave an economic collapse in its wake?

Its a chance of timing that all the likely turmoil of 2017 comes on the centenary of the October Revolution of 1917 in Russia. Thats an anniversary like no other. Surely, the socialist forces of the world are preparing to remember it. They could not have asked for a better 2017 to mark the occasion.

To many liberalsand conservativesTrump must appear like a veritable combination of Lenin and Czar! The centenary will take place in a world that, apart from the market euphoria, is still experiencing a profound socio-economic crisis. Nobody has yet to show the solution and the possible ways out.

Part of the problem is that the media has masked the extent of the crisis. Its more than simply economic, there are deep sociological effects. Indeed, the sheer value of wealth amassed through the markets defies the imagination. There are more billionaires than ever. But the disparity of wealth is equally flabbergasting.

Its not even an issue of the fabled one percent. The entry fee to that club is an income of no less than $350,000/year in the United States. (Source: The .1 percent are the true villains: What Americans dont understand about income inequality, Salon, April 14, 2016.)

However, the one percent is nothing compared to the 0.1 percent. They own as much wealth as the bottom 90% of America combined. (Source: Ibid). These include some of the Silicon Valley tech CEOs and a few speculators (George Soros comes to mind) who have championed the anti-Trump cause so vociferously.

Thats a key to predicting just how disruptive the anti-Trump protests could become. Indeed, a rough estimate of the 0.1 percent suggests Trump has at least half of those billionaires against him. Therefore, they have plenty of funds to keep the protest and disruption machine running. Trump will push his agenda, but he could end up like the captain of a ship that lost its rudder.

The reason why Trumps contested administration can affect the markets and prompt an economic crash is the unknown. Former U.S. defense secretary Donald Rumsfeld once attributed the difficulties of the Iraq campaign to the difference between known unknowns and unknown unknowns.

Many pundits made fun of the seemingly nonsensical statement, but Rumsfeld was brilliant in his description. There are risks you can expect and risks you never even considered. The Trump era has brought us the latter situation. Markets thrive in volatility, but markets dont like uncertainty for long. Global economic growth has depended ever more on a stable America.

The U.S. political scene will play a key role in determining whether global growth will accelerate. Trump has proposed a mixed bag of policies; they are both pro-growth and anti-growth.

The fact that the new president has started from day one trying to actuate some of his more radical proposals has frightened the world. He has launched the Wall, blocked immigration from seven countries, put Iran on notice, stripped Americas participation in the TPP, and reversed over fifteen years of hostile politics toward Moscow in a matter of days.

It remains to be seen if Trump proceeds with tax reform and reducing regulations. But the markets seem to believe him on that front. Indeed, hes done nothing if not keep what he promised his voters.

But while investors like some of the policies, its unclear what effect they will have in the medium term. For example, Trump will, by choice, focus on restricting global trade and deporting illegal immigrants. Inevitably, this policy will catch up with basic economics, such that the economy will start slowing down. It may even enter a phase of recession.

Trump will essentially take America away from global pro-growth policies. These have sometimes helped counter the effects of misguided government policies. Now, America will have to endure a bigger slice of the risk.

And what risk indeed: President Trump wants to lift or significantly revise the Dodd-Frank Act. This was a cornerstone of President Obamas mechanisms to reduce the risk of another Lehman Brotherscollapse and economic depression. The new president has already announced steps to roll back the rules that have ostensibly reduced market risk but reduced gains since 2008. (Source: Trump Moves to Roll Back Obama-Era Financial Regulations, The New York Times, February 3, 2017.)

Apart from the risk, its telling that Trump is moving like a peregrine falcon on his prey on this policy, which benefits the one percent. Indeed, Trump appears to have forgotten the forgotten man of the campaign that earned him so many votes from the less privileged Americans.

The Dodd-Frank Act was one of the cornerstones of the Obama administration. Trump wants this to revive the spirit of entrepreneurship, but it might prove a surprise that could catch all of us unprepared.

At first there will be growth. But speculation-based growth produces surprises, not all of them of the good kind. Risky investments might appear to be safer than they are. Investors tend to see the risk of a stock as a potential deviation from the expected level of profits. They pay little attention to price in the sense of the P/E ratio.

Trump has other priorities; he has preferred the banks to the common man. But financial deregulations could produce veritable fireworks. The Dodd-Frank Act has limited the extent that banks can speculate. Soon, they will be back in the financial Wild West, reviving the conditions that led to the subprime collapse.

Finally, Trump has started to sound the first salvos of a potential intervention in Iran. Of all the risks, this is the biggest. Iran is a unified nationalist country with a patriotic military. It wont be a cakewalk like Iraq. Getting bogged down in Iran would be far costlier. Its not clear where Trump wants to go by taunting Iran, but so far, it appears like the kind of risk that could cause economic collapse 2017.

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Economic Crash 2017 and How the Next Financial Crisis Could Be Worse Than 2008 - Lombardi Letter