American Consequences - December 2018

month, but only 155,000 jobs were added. That’s also less than the three-month average of 170,000. Meanwhile, homebuilder stocks have been crushed as the industry feels the effects of rising interest rates... Last week, Toll Brothers – one of the nation’s largest homebuilders – said its new home orders fell 13% year-over- year in the fourth quarter. That was its first drop in orders since 2014. We’ve also seen volatility return to the stock market... The benchmark S&P 500 Index has experienced two corrections – declines of 10% or more from recent highs – this year. That hasn’t happened since 1990. After years of complacency, investors are getting nervous. The federal funds rate now sits at 2.25%. That’s the highest it has been since March 2008 – right before financial firm Lehman Brothers met its demise at the onset of the last crisis. Traditionally, higher interest rates mean better returns on assets denominated in U.S. dollars – like U.S. Treasury bonds. Because of that, investors have less reason to hold “safe haven” assets – like gold and other precious metals – that don’t pay interest. But these folks are overlooking a dangerous long-term implication of rising rates... A looming debt bubble . With more than $20 trillion in national debt, every 1% rise in borrowing costs equals $200 billion in new interest payments. And the feds aren’t the only ones spending like drunken sailors... U.S. household debt has reached $13.5 trillion.

Corporate debt in the country sits at more than $9 trillion. Tack on another $1.5 trillion in student debt. They’re all at record levels. As rates go up, these debts will be harder for everyone to service. Defaults could start a panic across the entire U.S. economy. And equities could take a hit across the board. We simply can’t afford higher borrowing costs. As this ballooning crisis looms larger with each passing year, it’ll be increasingly difficult for the Fed to “quantitatively ease” its way out of this current deficit without serious – and significant – consequences. And the most likely scenario is that the value of the U.S. dollar will plunge. Retail survivor or recession indicator? According to Axios, today there are more than 30,000 dollar stores in the United States – nearly a 70% increase from about a decade ago. That’s more stores than the country’s six biggest brick-and-mortar retailers combined , including Walmart and CVS. While we’ve seen the so-called “Death of Retail” bring down familiar names like Sears and JC Penney, dollar stores have thrived. This is especially true in rural America, where wages and growth tend to lag larger coastal cities. During the last recession, dollar stores experienced a surge in growth and displaced big-name, low-cost alternatives like Walmart. So while the current growth of dollar stores isn’t unusual, economists – and investors – are keeping a close eye on the sector as we move to 2019.

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