Donald Trump embraces Donald Trump Jr as Lara Trump, Eric Trump and Tiffany Trump look on at his campaign rally, at PPG Paints Arena in Pittsburgh, Pennsylvania, U.S., November 4, 2024. REUTERS/Brian Snyder
This isn’t an investment letter and I’m not an investment advisor. But I want to warn you. The financial economy — stocks, bonds, and their derivatives — is in for a big reality check, and I think it will happen soon.
The real economy is showing worrisome signs. Yesterday’s Commerce Department report about the U.S. economy’s performance in the second quarter — April to June — revealed serious strains.
Although consumer spending is up from the first quarter, the 1.4 percent rate of growth in the second is nothing to write home about. It’s slower than the growth rate throughout most of the Biden administration.
Also worrisome is that U.S. exports fell during the second quarter, particularly in the auto sector.
And real final sales to private domestic purchasers — which reflect consumer spending and private investment — increased just 1.2 percent in the second quarter. That’s down from the first three months of the year.
And remember: Trump’s big tariffs haven’t hit yet. They go into effect tomorrow. That will cause prices to rise and consumers to pull back. Trump has set a 50 percent tariff on semi-finished copper imports. He has also imposed a 50 percent tariff on Brazilian goods, following through with his threat to punish the country over several political disputes. Canada will see tariffs on many of its exports to the United States increased to 35 percent from 25 percent.
Yet despite all this worrisome news, investors are going nuts buying up super-risky assets.
The financial economy is immersed in the kind of wild gambling we saw leading up to the 2008 financial crisis. We’re seeing it all over again — this time with cryptocurrency tokens, meme stocks, junk bonds, shares of Meta and Microsoft, and the reemergence of blank-check entities (better known as SPACs, or special purpose acquisition companies).
I attribute all the high-risk gambling to the high-risk gambling of the gambler-in-chief who sits in the Oval Office. He’s into crypto and meme stocks, and has done well with his own blank-check entity. Plus, he’s a conman’s conman.
Investors figure he must know what he’s doing — and even if he doesn’t, he’s shown no compunctions about using every lever of government power to keep the party going. So investors are following him, although more and more of these investments look like pyramid schemes — whose return depends on recruiting ever more people into buying and selling them, until some schnooks are left holding the bag.
Meanwhile, investors are pouring money into AI, without knowing what it is or which if any corporation will come out on top. Meta’s revenue jumped 22 percent year over year to $47.5 billion and beat Wall Street’s targets by the widest margin in more than four years. Microsoft has also made huge investments in AI.
The AI gold rush started three years ago with the launch of ChatGPT, and most of the financial rewards so far have gone to Nvidia — whose revenue has jumped 10-fold since ChatGPT’s launch, with its market cap crossing the $4 trillion mark earlier this month.
This does feel like a gold rush. And it’s taking place on top of the most blatant corruption this country has witnessed since the first Gilded Age of the late nineteenth century.
As Trump and his family make hundreds of millions of dollars off of crypto, Trump is pushing crypto and changing the laws to encourage more use of it. In a landmark report issued yesterday, the Trump regime laid out a series of recommendations aimed at further promoting cryptocurrency markets.
Senator Elizabeth Warren and two Democratic colleagues questioned the nation’s new stablecoin regulator, newly confirmed Comptroller of the Currency Jonathan Gould, over how he’ll respond to pressure from Trump as the agency begins overseeing the stablecoin market — where the Trump family business is now a player with its own stablecoin.
Gould is in the early stages of implementing the new stablecoin regulatory regime created under the GENIUS Act, which Trump signed into law earlier this month. The legislation gives the Comptroller expanded oversight of nonbank stablecoin issuers.
It’s starting to feel as if the financial economy is no longer moored to the real one. Treasury Secretary Scott Bessent went so far yesterday as to characterize the new “Trump accounts” — tax-deferred investment accounts created in Trump’s sweeping Big Ugly tax law earlier this month — as a “transformative tool” for building long-term wealth and a “backdoor for privatizing Social Security.”
Hello? So the Trump regime wants us to give up on Social Security and become gamblers in the stock and bond markets? At the very time when the finance is becoming so frothy that such gambling is exceptionally risky?
Well, you know the outcome: The little guys will get hurt and the biggest gamblers will get away with it because they’ll get out just in time or they’ll get the government to bail them out. That was the story of 2008. It’s likely to be the story again.
So, my friends, please beware. I’m not suggesting you cash in your stocks and bonds, but if I were you I wouldn’t follow the crowd into more risky investments. Again, I’m not an investment advisor, but there’s so much wild gambling going on right now that I fear we’re soon in for another financial crisis.
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Robert Reich is a professor of public policy at Berkeley and former secretary of labor. His writings can be found at https://robertreich.substack.com/.