Treece Blog: Holy-conomyWritten by Dock David Treece | | email@example.com
Of all the obstacles to economic growth, uncertainty is undoubtedly the most hindering. Uncertainty about policy, prices, armed conflict, even weather — the more uncertainty that exists in an economic system, the worse it is for growth.
When uncertainty is prevalent, business leaders can’t make decisions based on reliable forecasts. In some instances they can’t depend on consistent government policy (as is the case today); other times they can’t know whether they have dependable sources of natural resources. All of these things dictate the framework within which businesses and their leaders must operate, and a shaky framework prevents leaders from having the confidence they need to grow.
Consider Obamacare as one example. Like the concept or not, the Affordable Care Act has probably been the single worst-handled piece of American legislation in the past half-century. It has also been one of the most far-reaching, directly impacting more than 15 percent of the U.S. economy along with every major employer.
Democratic-led health care reform (post-Bill Clinton presidency) was first floated as a concept during the 2008 primaries, but business leaders were unsure whether it would be pursued. They were also unsure whether Barack Obama’s plan or Hillary Clinton’s would be the one on the table.
After the 2008 presidential election, business leaders had to wonder if Obama’s plan would be passed. After passage, there were doubts as to whether the Supreme Court would uphold the new law.
These steps have introduced another layer of uncertainty that has impacted business leaders’ thinking. Many have been frozen with indecision about whether to expand, to hire or fire, since no one knows what another employee might cost six months after hiring.
And now, after all the uncertainty is finally subsiding, Congress is generating a new debate on whether to repeal Obamacare entirely.
Business leaders aren’t the only ones impacted. Individuals also have greater trouble making decisions. For instance, people can’t necessarily depend on a job to remain available indefinitely, or even know if a company will survive a future downturn as the result of changing circumstances.
Traders and investors are similarly paralyzed because they’re left clueless as to what demand will look like in six months. It’s totally unknown what commodity prices will be, let alone what the geopolitical landscape will look like.
Along with uncertainty, leverage and illiquidity comprise the three biggest threats for any developed economy. Today in the U.S., there’s far too much leverage and far too little liquidity. Margin debt is at the highest levels on record while at the same time market liquidity is extremely low because (1) most investors, thinking the market is going to continue higher indefinitely, are fully invested and (2) most major banks have backed out of trading, making it less likely they’ll prop up the market in another downturn.
The end result is that, should market sentiment change quickly, financial markets are going to suffer major moves lower. When increased levels of uncertainty, leverage and illiquidity exist all at the same time, there’s no such thing as small moves down.
Dock David Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and is licensed with FINRA through Treece Financial Services Corp. He provides expert content to numerous media outlets. The above information is the express opinion of Dock David Treece and should not be construed as investment advice or used without outside verification.