The New Year could bring some scary economic trends with it. I think the American economy is fairly good; however, there are some scary economic trends out there.
Some scary economic trends to worry about in 2019 include:
Overheated Real Estate
For instance, the average home price in Los Angeles is $686,500. Meanwhile, the average home price in Denver is $424,200, Zillow calculates.
I think these prices are unsustainable because of income inequality and wage stagnation. There are three dangers from overheated real estate to worry about.
First, a zombie market in which real estate prices are so high nobody can buy. Thus, vast amounts of real estate will sit empty with no buyers. A major problem is that many owners will refuse to sell because they think prices will go up again.
Second, a quick collapse in which prices suddenly spiral downwards. That leads to panic selling, sudden price collapses, and hysteria.
Third, vast amounts of “underwater property” as we saw in 2007 and 2008. A property is underwater when the mortgage exceeds its value. Hence, the owner will lose money on the transaction if she sells.
Higher Interest Rates
Fourth, the main fiscal remedy for an overheated real estate market is to raise interest rates. To explain, higher interest rates increase mortgage costs which can discourage real estate purchases.
Notably, the Federal Reserve raised interest rates on 20 December 2018, which is spooking Wall Street. An interest rate hike can backfire because it could not discourage real estate speculation.
Thus higher interest rates can lead to a zombie real-estate market. Higher interest rates cause zombie real-estate because people will wait for rates to buy or fall to list properties.
A Growing Retail Apocalypse
The retail apocalypse will get worse in 2019 because major brands like Sears (OTC: SHLD) are collapsing.
Department stores like Sears and JC Penney (NYSE: JCP) could collapse completely in 2019. Meanwhile, brands like Macy’s (NYSE: M) could close dozens of locations. Either way, hundreds of jobs could disappear.
Even some healthy chains such as Walmart’s Sam’s Club are cutting back. Sam’s Club is closing 63 stores. In addition, Southeastern Grocers is closing 94 Winn-Dixie and Bi-Lo supermarkets, Moneywise reports.
Specialty retailers are hard hit by competition from Amazon. For instance, Toys R Us shut down completely in 2018 and Brookstone closed all 102 of its mall stores.
Expect far greater retail carnage in 2019, particularly in the supermarket and department sectors. Falling sales and collapsing revenues plague many chains.. To add to the pain many retailers have gorged on cheap debt they can never pay back.
In particular, expect a wave of retail bankruptcies right after the holiday season. Sears, JC Penney and Barnes & Noble (NYSE: BKS) are among the retailers that could die in 2019.
A long-term trend to fear is retail automation efforts like Amazon’s (NASDAQ: AMZN) Go no-cashier convenience store. To explain, no-cashier means no cashiers’ jobs, and no paychecks for many families.
Tellingly, Walmart (NYSE: WMT), our largest retailer and private employer, is experimenting with robot janitors and stock checkers. In particular, Walmart plans to deploy robot janitors in January 2018.
An all-out trade war with China could devastate the American economy in three ways.
First, consumer prices could increase dramatically because they manufacture vast amounts of merchandise in China. Unfortunately, the amount of prices increases is hard to predict because the true cost of a lot of consumer goods is unknown.
The worst-case scenario is that many middle and working-class families can no longer afford basic consumer goods like shoes, electronics, and clothes.
Second, a trade war could devastate agriculture because China is the main market for a lot of American foodstuffs. Notably, farmers are already going bankrupt at an alarming rate, Vox reports. Trade tensions are to blame because commodity prices have been falling.
Third, the market for many industrial goods and products could disappear. For example, China is a major market for machine tools, oil, and coal.
An Oil Price Collapse
Of all the scary economic trends out there this, I think oil price collapse is the most frightening.
Specifically, an oil price collapse could lead to chaos in the Middle East by triggering political and economic collapses in countries like Saudi Arabia and Iran.
Remember, the collapse of Iraq and Syria spawned ISIS and its global reign of terror. The worst case results of oil price collapse include an all-out war in the Middle East and a surge in terrorism.
Closer to home, an oil price collapse could lead to a recession in the Oil Patch, especially Texas. In addition, it could wipe out the stock values of companies like Exxon-Mobile (NYSE: XOM) and large pieces of many American’s retirement portfolios.
Notably, oil prices have tumbled by more than one third since October, CNBC reports. In particular, the price for light, sweet, crude fell by 6.7% in one trading day on Christmas Eve, 2018, The Wall Street Journal reports. Thus oil could suddenly lose most of its value in 2019.
Light, sweet, crude was trading at $42.53 a barrel on 24 December 2018, for instance. Under these circumstances, oil prices of less than $20 a barrel are possible by December 2019.
Political Chaos in Washington
Stocks have fallen sharply in the two months since the Democratic success in the midterm elections. For instance, The New York Times claims stocks experienced the biggest December decline since the 1930s in 2018.
Notably, the Dow Jones was below 23,000 for the first time in 14 months on 20 December 2018. Thus, if the New Year leads to new political battles we could see more economic chaos.
Political events to worry about: include an attempted Trump impeachment and an all-out political war between President Donald J. Trump (R-New York) and the House of Representatives. For example, Trump and Congress could not agree upon a budget deal to prevent a government shutdown on 21 December 2018.
By Christmas 2018, the government shutdown was entering its fourth day, The New York Times reports. Disturbingly, neither Trump nor Congressional leaders seemed willing to compromise to end the crisis.
The current gridlock is frightening because the new Democratic majority in the U.S. House of Representatives has not taken office yet. Consequently, the S&P 500 fell by 2.7% on 24 December 2018.
I expect things to get worse in January when Democrats take over the House. Specifically, a continued shutdown will give House Democrats a good reason to try to impeach Trump.
Total chaos could ensue if Trump announces he will not seek reelection. Note: I don’t think Trump plans to seek reelection. In particular, the market could take a nosedive if it looks like a left-wing Democrat will win the next Presidential election. Plus, a bad economy will give the Donald a strong incentive not to run.
An added twist that could really spook Mr. Market is Trump doubling down on his idiotic “America First” doctrine. For instance, America First could include hotter and bigger trade wars which could dampen growth. Trump is pushing America First because it is the only part of his agenda with popular appeal.
Out-of-Control Healthcare Costs
Healthcare costs are rising so fast they even scare Warren Buffett, JPMorgan Chase CEO Jamie Dimon, and Jeff Bezos. The trio of billionaires is so scared of healthcare costs they are organizing a new company to contain them.
Tellingly, healthcare accounted for 17.9% of the US gross domestic product (GDP) in 2016 and it was rising at a rate of 4.3% a year. At that rate, CNN estimates healthcare could form 19.9% of America’s GDP in 2025.
Out-of-control healthcare spending dampens economic growth and discourages hiring. Organizations refuse to hire because of high health insurance premiums. Plus, money gets diverted from productive uses like investment in industry to healthcare spending.
Moreover, popular anger at expensive healthcare encourages politicians to push radical fixes to the problem. For example, prominent Democrats are openly Tweeting about single-payer healthcare and Medicare for all. In addition, Republicans are doubling down on efforts to kill Obamacare.
Hence, out-of-control healthcare costs generate more political uncertainty.
Finally, nobody in Washington is talking about long-term scary economic trends like income inequality, climate change, wage stagnation, student loan debt, automobile loan debt, corporate debt, underfunding of research, underfunding of education, lack of retirement savings, and technological unemployment. Those trends are scary because any of them could start spiral out of control in 2019.
I expect 2019 to be a good year economically, but any of the scary economic trends could trigger a crisis.