The Looming Economic Crisis: The Potential Crash in 2018 and Beyond

As we approach the horizon, many are skeptical of the rosy outlook suggested by sweeping economic policies and technological advancements. The current euphoria surrounding the U.S. economy is tempered by significant risks and potential economic downturns. In this article, we will delve into the factors that may contribute to a looming economic crash, particularly in 2018 and beyond, and what we should be prepared for.

Is Another Economic Crash Imminent?

There's no question that the market is under a cloud of potential risks. President Biden's progressive policies, while well-intentioned, may inadvertently exacerbate existing issues. The current market fervor is driven by the belief that government can 'solve' problems through the whimsical use of money, but this largesse has its limits. Housing market bubbles are visibly forming, driven by fast-rising lumber costs, material shortages, and low inventory. In a desperate scramble to secure a home, bidding wars are common, and low interest rates have further fueled this frenzy, making it unsustainable in the long term.

Telecommuting and Its Future

The rise of telecommuting is often heralded as the future of work, with remote work becoming increasingly popular, particularly during the pandemic. However, this shift has brought its own set of challenges. While digital workspaces offer flexibility and convenience, they also raise issues like supervision and productivity measurement. Many jobs may revert to rental corporate office settings, leading to displacement and long commutes for many workers. This transition has largely been driven by forced circumstances rather than strategic planning, and its long-term viability remains uncertain.

Understanding the Housing Market Bubble

The housing market is a primary indicator of economic health. It is currently a bubble, with millennial and speculative buyers disproportionately driving up prices. However, the average person lives in a home for only 5 to 7 years, and numerous life events (such as job changes, divorces) necessitate frequent relocation. The statistics clearly show that buying and selling are based on consumer confidence and expectations, which are currently at peak levels. A minor drop in value or activity could trigger a massive panic in the market, leading to another economic crash.

Earnings and P/E Ratios

The current market conditions are characterized by high P/E ratios for both the Dow-30 and SP-500, reaching levels last seen before the dot-com crash. Historically, P/E ratios revert to the mean, and if the current levels revert to a more normal ratio of around 16, the SP would have to drop by nearly 50%, or earnings would have to drop, or share buybacks would have to be greatly reduced. Any slowing in earnings growth would trigger a sell-off, and any earnings warnings would further reduce share prices.

Inflation: A Slowdown in the Economy

Inflation is starting to make its presence felt after decades of zero inflation. The current zero-inflation environment means that wage increases can only come from increased skills or productivity. However, if wage increases lead to higher inflation, it could result in a reduction in the standard of living. The 1950s were characterized by a unique economic situation, where manufacturing was concentrated in the U.S. due to the destruction of manufacturing hubs during the war. However, this was a temporary anomaly, and with the rest of the world catching up, the U.S. faced inflation, stagflation, and unemployment. Without a new product or industry to jumpstart the economy, the prospects of a prolonged period of stagflation loom large.

In conclusion, while there may not be an economic crash in 2018 or 2019, the potential for such a downturn is very real and will likely happen at an unexpected time. As we navigate through these uncertain economic waters, it is crucial to be prepared and vigilant. The signs are there, and the only question is, 'when?'