Former Republican congressman and presidential candidate Ron Paul has been very vocal over the last few days regarding his bearish stance on the US economy, US stock markets and distrust of Donald Trump. While Ron Paul is a renowned bear of the US stock market even his suggestion that it “wouldn’t be a total shock to me” to see stock markets down 25% and gold up 50% as soon October is a little too bearish. While nobody else is forecasting that kind of correction it has made some investors sit up and listen and re-evaluate their plans for the future.
Federal Reserve
At a time when the Federal Reserve would appear to be an easy target of criticism it will be no surprise to learn that Ron Paul believes that the Fed is to blame for much of the forthcoming pain. He is not the first investment expert to criticise the extended period of low interest rates which has only recently come to an end. This has allowed US businesses, investors and the general public to build up excessive debt at a time when the economy is growing but not at the rate many had expected.
Paul suggested that “there are so many mistakes made out there that the correction is almost unlimited” with the Fed at the centre of these problems. If you do take a step back and look at the situation from a distance, you can easy argue that far too much is being taken on trust with regards to promises made by Donald Trump. Has this trust pushed markets to levels which are unsustainable without backup policies?
Too much debt
In reality we always knew there would be issues as and when US base rates hit the bottom and began to move back towards more traditional levels. The fact it has taken nearly a decade for this cycle to turn will have surprised many people but over that time an enormous amount of debt has built up. Those with outstanding loans will certainly feel the pinch as base rates continue to rise and finance costs follow suit. This is as certain as night follows day but how many consumers and businesses have considered their increased payments once the cycle did turn?
The next few months will be an interesting time for the Fed which will be looking to balance an increase in base rate against an economy which is fragile and nowhere near as strong as many might believe. This is a similar situation to that faced by central banks across the globe today with the Bank of England the latest to begin consideration of this balancing act.
Ron Paul’s track record
Timing is obviously of the essence to investors so many will be relieved to learn that Ron Paul made a similar prediction almost 12 months ago. Since his initial downbeat assessment of the US stock market and US economy we have seen the S&P 500 up 21%, Dow Jones industrial average up 24% and the NASDAQ up a staggering 34%. He argues that any upside in the short to medium term simply makes his doomsday scenario ever more likely and in some ways it is difficult to disagree with them.
At this moment in time markets are most definitely pro-Donald Trump but if this were to change, if he failed to deliver on policies, this could shatter investor confidence and lead to a “correction” across investment markets.