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.
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