Best Ideas

Catalysts (for a Major Shift in Credit Quality)


While recent economic results have been fairly robust (i.e., 2.9% GDP growth for the 4th quarter of 2018 and record low unemployment), there are incipient risks which have the potential for causing harm. The focus of this report are those areas which are unsustainable from the perspective of traditional economics and have the potential to derail economies. While the concerns are real and in many cases growing, the vigilance of the central banks provide a salve.

Challenges/ Concerns: United States Governance – probably the largest risk is the growing divide between the two major political parties. In the case of the Democrats, it appears that most legitimate presidential candidates need socialistic policies to be considered serious candidates (the entrance of Mr. Biden as a candidate might change the narrative) while in the Republican circles, Mr. Trump continues to be beset by attacks from a variety of sources. The upshot of the friction is increased difficulty in making any real progress, which based on historical results might not be terrible. Nonetheless, if the policies of Alexandria Ocasio-Cortez and other similar representatives become the accepted platform of the Democratic party, growth is likely to be curtailed. The 2020 presidential elections are dominating Washington as candidates and parties attempt to assume optimal stances to win the nomination and the election. A major test is whether the maxim “it’s the economy stupid” still applies or whether the plethora of negative news on Mr. Trump trumps progress on the economy. EJR Comment – despite the turmoil, the economy is continuing to grow.

European Union – despite negative interest rates, the EU is not growing much and is probably shrinking. Adding to the problems are tariffs, the weak operating results for Deutsche Bank, the Italian banks, and concerns about some of the other major banks. Over the past decade via quantitative easing and depressed interest rates, the ECB has been the savior by providing capital to those areas which need support. Probably the most pressing concerns are Brexit, addressing the budget shortfalls in Italy and Spain, and recapitalizing the major banks EJR Comment – despite the turmoil, the EU has massive staying power.