Fresh off his Nobel Prize for Economics, University of Chicago Professor Richard Thaler has admitted to being puzzled and worried about the current market exuberance. “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping.” Thaler says he doesn’t understand it; anyone paying attention to global risks today surely would have made some investment adjustments by now. Yet stock indexes remain near all-time highs.
Thaler proved that human beings are “predictably irrational,” helping shed light on how sound investment strategies can go awry. “Economic agents are human, and …economic models have to incorporate that,” Thaler was quoted as saying about his award-winning work. So what is it Thaler is so worried about now?
In an interview with Bloomberg, Thaler explains his is puxzzled by not only record highs in the main indexes, but extremely low volatility as well. Outside forces have not been able to correct for potential headwinds or roadblocks; from a massive data breach at Equifax (EFX - Free Report) to saber-rattling between President Trump and North Korea’s Kim Jong-un regarding nuclear annihilation, nothing has been able to move the needle deeply to the negative, nor for long. Failures of major policy shifts in Congress — including repealing and replacing Obamacare, as well as sound immigration reform — have added to this perceived wall of worry.
On top of this, we’ve seen an extraordinary amount of natural disasters in the Western Hemisphere in just the past 60 days — hurricanes in the Caribbean and Gulf of Mexico, earthquakes outside Mexico City, and now devastating wildfires in Northern California — which are costing lives and livelihoods, and will require extraordinary capital outlays to make these regions whole again. And finally, the looming shadow of the investigation into Russia’s involvement with the Trump administration in affecting last November’s U.S. General Election has yet to be brought to light.
So what does Thaler see as the biggest risk the stock market is avoiding currently, the one that is most likely to set a correction into play from our current lofty levels? “Surely [the markets’ record highs] can’t be based on the certitude that there will be a massive tax cut, given the seeming inability of the Republican Congress to get their act together.” Meaning Thaler thinks that, as with healthcare and immigration reform previously this year, Congress will again be unable to bring forth meaningful change on tax reform. And if this results in no windfall corporate tax cut — this year, next year, or ever — chances are this reality will set in and manifest as a new downward trend.
President Trump will give an address this evening regarding his tax reform proposals, including how many Americans will stand to receive $4000 as a result of new tax policy. But deficit hawks on the right will not see much benefit in putting an additional $1-2 trillion back onto the books just to score a near-term cash windfall. And this is before even discussing whether anyone on the left side of the congressional aisle will have any interest in providing fiscal benefits to multi-billion-dollar corporations.