Booming Economy vs. Looming Debt

Booming Economy vs. Looming Debt

Last week we described a soaring GDP number and that there looked to be multiple factors supporting continued growth.  It was a series of great datapoints that have been a constant since the election of President Trump!

This week, however, the US Treasury reported soaring debt sales topping the previous high from March.  Many standard conservative deficit hawks bemoaned the soaring debt, which some reports are now showing well above the 100% of GDP – that usually means a debt crisis is coming.

Sales of US Treasuries are needed to fund the US government’s fiscal deficits, as our government’s budget has been woefully unbalanced for decades.  There was a four-year period from 1998 through 2001 in which the budget was balanced, encompassing the last three years of the Clinton Administration and the first year of the Bush Administration.  Those 4 years saw budget surpluses and a brief moment of hope that we would begin to pay down US debt.   Before 1998, there was one year under Nixon (1970) the budget was balanced, and then again in 1960.  Prior to the Vietnam War, the US regularly ran a mix of budget surpluses and deficits during peace time (Peace being the operative term – enormous debts were run up during both World Wars).  The permanent deficit, however, has become a fixture of the 21st century.

There are arguments pro and con regarding the importance of debt and deficits – Japan’s debt is 200% of their GDP… China has trillions in debt … France, Canada, Spain, and Britain all have higher debt-per-GDP numbers than the United States.  But America is the central player in the global economy.  Our debt load matters.

Or does it? 

 There remains a deep and liquid market for the sale of US Treasuries, and a very high demand for US debt.  As Eric Souza, senior portfolio manager at SVB Asset Management in San Francisco, recently stated: “From an absolute yield perspective, where else are you going to go?”   You apparently cannot satisfy the global appetite for US Treasuries.

If the market-makers are not worried about US government debt, what DOES worry them?  Not much – of all the global economies, the US remains the primary destination for investment.  But some of the issues that remain a background concern include the following:

If US Debt Is Not A Concern For The Market, What Are The Top 5 Issues Right Now That Worry The Investment Community?

 5.“Federal Reserve rate hikes”:  Rate hikes make the dollar stronger dollar, they hold down inflation – lots to like about the Federal reserve raising interest rates.  But it will squeeze money out of the market, as investment dollars chase yield with safer downsides.

4.“Decline in US Worker productivity”:  US worker productivity is up, but the gains are lower than projected.   It is currently the highest on record at 109.5 units per hour/per worker year over year, but the last decade has been the lowest on record – since we began keeping such data in 1947  .  Analysts fear there is not much more we can squeeze out of worker production, and with an aging population, that can be a dangerous combination.

3.“Inflation – the data point that always cries wolf”:  We have preached the dangers of inflation ever since the Obama Administration launched his stimulus package, Obamacare, and years of trillion-dollar deficits.  Yet the inflation never came … until now.  Inflation has been steadily rising throughout 2018 – from 2.0% to now 2.9%.  There is a tipping point on consumer prices, not a question of “if,” only “when.”

2.“Gas Prices keep going up”:   A corollary to inflation, and like inflation, rising gas prices can mean profits and rising stock prices for energy companies.  That benefits retirement and 401K portfolios.  But there is a tipping point for the consumer, when gas prices begin to eat away at their disposable income.  Once that happens, GDP will be negatively impacted.

1.“Trade War with China”:  The Trade War boogeyman doesn’t go away.  Yet, America is uniquely positioned to win trade conflicts.  Disputes always favor the nation running the trade deficit, since they are not reliant on exports for GDP growth.  Further, short term complaints from specific industries hit by tariff’s will increase the political pressure on the President, but long term we are well positioned.  America is the only country who has access to all self-reliant resources such as arable farm land, energy, timber, rare earths and drinking water.  Combined with a global network of allies such as the EU (recently joined with Trump to avoid tariff conflicts for now – in a direct rebuff to China), it is unlikely the United States would find substantial long-term negative impacts and would easily win a battle over trade.

In conclusion – GDP is soaring … economic indicators are through the roof … and the typical US debt offering did not cause a calamitous drop in US markets.  Despite all the potential headwinds, including long term debt service, things remain on an upward trajectory for the US economy.

Call now to get your money in a place where you can achieve growth and still maintain downside protection from stock market fluctuations. (877) 912-1919

 

Top 5 Reasons 4.1% GDP Growth is Just the Beginning!

Top 5 Reasons 4.1% GDP Growth Could Be Just the Beginning!

The top-line Gross Domestic Product (GDP) number came in for the second quarter last week, and it beat most analysts expectations with a resounding 4.1% of growth reported.

US GDP growth under President Trump so far has been below average – for Reagan standards – but extraordinary as compared to the economic numbers since the post-2008 crisis.   Furthermore, the growth has been more reflective of actual business activity – job hiring, business expansion, sales and wage growth – as opposed to government debt and banks buying and selling one another’s own stocks with borrowed federal dollars.

As we have commented in these blogs many times:  GDP growth based upon business expansion is “real” GDP growth; growth based upon zero interest rate policies and banks borrowing funds to buy other bank stocks – that is “artificial” growth.

Artificial growth still drives paper assets and markets, so your 401(k) will certainly benefit.  But you will not – and did not – see wage growth, employment growth, or real capital investments and marketplace expansion.  Therefore, growth fueled by monetary policy will be anemic, and it will be deleveraged at some point in the future.

Many analysts are claiming this is a “one-off” and 4.1% cannot be sustained.  The evidence they use is a surge in soybeans and other products above the year-over-year numbers as suppliers are afraid of Chinese retaliatory tariffs.  (This evidence is substantial:  last year’s soybeans sales increased 4.8% in the second quarter… this year was a record-setting 29% increase in sales).  But such anecdotal data ignores the larger trends and off-setting data, such as potentially increased soybean sales to Europe in the next quarter as part of a larger EU/US trade negotiation.

So, what are the primary reasons for optimism that 4.1% growth is just the beginning of great things to come:

Top 5 Reasons 4.1% GDP Growth Could Be Just the Beginning

  1. “Energy stocks did well in second quarter”: Headlines included “Energy stocks put up blowout numbers in second quarter” (CNBC) and “Energy topples tech as top sector” (Wall Street Journal) rippled across the media as the second quarter drew to a close.  The irony being that higher oil prices – typically bad for the consumer – can also provide at the same time positive signals, such as growing demand and stock appreciation for energy companies.  Gas prices can dampen consumer sentiment, but we are not at that inflection point.  The inflection point we are staring at is rising consumer demand, rising energy output, and rising valuations for energy stocks.  That is the win-win sweet spot which can give market watchers optimism in quarter number three.

 

  1. “Wages had their largest increase in over a decade”:  Keynesian followers who regularly preach in the media the “secular stagnation” argument harken back to the 1970’s to claim that as the last period the American worker saw an actual increase in wages.  This is, of course, untrue.  But, it does not mean that American workers rightfully recognize that their dollar does not stretch as far as it used to, and it has been more painful and difficult to “get by” as a middle-class family.  But at the end of June real wages had risen by 2.8%, their largest such increase in over 10 years. (US Dept. of Labor; BLS)  Simply put, most people made more money and had more disposable income in their pockets.  Those are real world numbers with a real-world impact – wages outstripping inflation.  This is strong data to support an ever-expanding GDP number moving forward.

 

  1. “Tax-reform has worked and is working”: Case in point #4 above.  Make no mistake, tax reform has allowed companies to pay workers more, to hire more workers, and to invest in capital expenditures.  We would have preferred flatter rates, combined with government reform needed to bring down spending.  But the basic, fundamental expectation of tax reform was to free up capital and labor for business expansion.  That did, and has, worked, and the after-effects are just now rounding into shape.  Tax reform will continue to increase GDP numbers for the remainder of the year.

 

  1. “De-regulation continues”:  Just one word, a hyphenated word, but one word can best describe the mountains of cash companies have made in their earnings reports, and are bringing home from overseas, and in monthly increases in consumer spending.  The repeal of Dodd-Frank empowered small regional banks to start lending again.  Energy – the most dynamic and vibrant of all sectors of the economy through the second quarter, greatly benefitted from deregulation and the lifting of drilling restrictions.  You could almost say “it’s morning in America again!”  If large sectors of the economy are free from government intervention, then this will keep the upward GDP momentum going.

 

  1. “Consumer confidence is driving business sentiment”: There will be no greater driver of continued GDP growth for the remainder of 2019 than business sentiment.  Whether to invest in capital, invest in new hires, increased wages, inventory expense, business expansion…..all is driven by what the business owner believes is waiting for him/her in the future.  Consumer confidence was up in the last quarter, and that was seen in the retail sales number.  If sales are up, business sentiment will be up, that is the business cycle in micro form.  If businesses are feeling good, expect a good second half to 2019.

 

Trade conflict and foreign policy concerns could derail upward GDP numbers, as could a negative outcome from the Mueller probe.  Inflation and gas prices can move beyond the inflection point and begin to damage consumer pocket books.  But our top five reasons are strong indications that GDP growth could easily top the 4.1% mark we saw in the second quarter as we move towards the end of 2018.

Call now to get your money in a place where it can achieve growth with this excellent economy but still maintain downside protection. (877) 912-1919

No Escape From the Middle East

No Escape From the Middle East

President Trump was elected on a platform that included “no more dumb wars.”  Whether our recent conflicts have been dumb may not answer a more pressing question – how to get out of the quagmire known as the Middle East.  His recent tweets, threatening the Iranian regime, do not suggest that we are near the end of America’s involvement in that part of the world.

There is no question that Trump campaigned on, and his supporters agreed with, bringing home US troops from the Middle East.  Afghanistan, Iraq … ”America First” meant getting out of other people’s fights.

But are they “other people’s” fights?  The US has allies in the region … America has a vested interest in the free flow of oil from the region … America is the only power that stands with Israel – a Western styled democracy in the middle of a region of authoritarians and royalty … markets rise and fall on the price of oil, meaning our money is impacted by the oil trade … terrorism is born and metastasized in the Middle Eastern countries … this region is not just “other people’s” problems.  America is fully invested in the matters of state within the Middle East.

Unlike North Korea, Iran does not have the same leverage.  Despite daily news coverage of the regime, in concert with Russia, flaunting American interests and international norms, Iran could be playing a losing hand:

Top 3 Reasons Trump is Right to Threaten Iran:

  1. “Their strategic depth is limited in the region”: Unlike North Korea, which has Cold War ties to Russia, a benign patron in China, and an opponent in South Korea that does not want war, Iran is primarily on its own.  Russia is a partner on a transactional basis and does not have the capital or soft power benefits to give to Iran.  US forces are next door in Iraq but also next door in Afghanistan.  The US 5th Fleet patrols the Persian Gulf.  The Saudis and most Sunni tribes oppose Iran on religious grounds, and Israel is a military hegemon for the region with strategic strength.  Bottom line, Iran is much more isolated than other US enemies.
  2. “Their economy is in free-fall, with more US sanctions on the way”: Sanctions have wrecked the Iranian economy.  Even as Europeans wish to stay in the now defunct JCPOA agreement, their home-grown corporations are running for the hills.  When given a choice – do business with America or Iran – that’s not really a choice.  Oil is, for the time being, traded in dollars.  When you attempt to go outside dollars in the oil trade, you impose taxes on yourself, which is exactly what Iran has done.  Their currency is in freefall this year.  On every economic measurable, their economy is collapsing … and more US sanctions are on the way.
  3. “Iranian citizens oppose conflict and are in many respects pro-Western”: Iran’s youthful population is by no means pro-American, but the great victory of Pax Americana is that you can buy a Coke and some Nike shoes in every corner of the globe.  The Iranian public’s desire for freedom from their Muslim overlords was apparent during the Green Revolution in 2009 and the most recent protests against the government.  Trump’s tweets provide a public stance against the regime and can give confidence to aspiring pro-Democracy groups within the country.

 Top 3 Reasons Trump is Wrong to Threaten Iran:

  1. “Another Middle East war would be catastrophic”: It is hard to describe all of the potential bad outcomes of another war in the Middle East involving US troops.  While the initial assault may have the support of Israel and Arab allies, the conflict would most likely spread and in ways we could not contain:  missile strikes from Hezbollah into Israel … terror strikes in Riyahd … terror strikes on the US homeland … the potential of Russia getting involved … counter-moves in other regions by China … oil prices skyrocket and impact the global economy in much more damaging ways than we could imagine……don’t confuse our ability to win a war and the capacity of US soldiers to win any engagement with the political decisions that will most likely cause the most harm.  America, if willing to fight to the end, cannot be defeated.  But today’s political leaders usually don’t have the stomach for Dresden and Tokyo-styled “total war.”
  2. “Follow through will be hard”:  Trump was elected while campaigning against “stupid” wars and specifically the Bush invasion of Iraq.  This is the second major party candidate to win an election based upon an anti-war stance (Obama ‘08).  The public no longer trusts its leaders to tell the truth about why we go to war, and to properly execute the war once we are in it.  Much of that is the public misconstrues much of how the US global order is maintained, but it doesn’t change the fact that (A) voters have soured on sending our soldiers abroad; (B) Trump promised to stop getting into such conflicts; and, (C) there is no public support for another military engagement in the Middle East.
  3. “If we do go in, it won’t be a walk in the park”: Iraq was flat terrain and just a few major population centers in a country of 25 million.  We controlled 30% of the airspace for over a decade since the first Gulf War.  We had infiltrated the entire Iraqi government with spies and hacked their networks.  And yet we saw how well that expedition went.  Iran has a population of 70+ million.  The terrain is a combination of all forms of warfare – mountainous, desert, and urban.  Its population is spread out over a land mass double in size.  Its nuclear weapons facilities are hardened and spread out throughout the country.  It has a global terror network which can create asymmetrical conflict in a moment’s notice.   The American military would not lose a fight, but if we are not willing to exert total war on an enemy, the costs of this fight will be unimaginable, and would not have public support.

After the tweetstorm exchange, Trump has signaled his willingness to “deal” with Iran.  We have entered a new era of nuclear proliferation.  Unless the US is willing to enforce non-proliferation with force, then we have little that can stop countries from developing these types of weapons.  It is not the 80s or 90s anymore – and maybe this volatility is reason that your money should be in safer places as well.

Call now and speak with your Ty J. Young Inc. advisor at no cost or obligation. Learn how you can have your retirement money protected and growing at the same time. (877) 912-1919