“Government Debt is at the tipping point”

Government Debt is at the Tipping Point

The last two Administrations, Republican and Democrat, doubled government debt during their time in office.  George W. Bush increased the national debt from $5 trillion to $10 trillion.  Barack Obama doubled it from $10 trillion to $20 trillion.  Obama did have the 2008 financial crisis to clean up, but the crisis had abated by the end of 2009, and deficits ran over $1 trillion five times during his two terms.

The public has largely been conditioned to not be concerned about deficits and debt.  Former Vice President, Dick Cheney, famously was quoted as saying “Deficits don’t matter!”  (Cheney was taken out of context, he was referring to the fact that the public doesn’t believe they matter, as opposed to whether they actually do or don’t).

It is important to note that these figures above are merely a drop in the bucket as to the true nature of our debt liabilities.  Unfunded liabilities and state and local debts dwarf the size of the officially reported federal government’s public debt.  Just consider some of the numbers:

1)            ALL State Debt:  $1.2 trillion

2)            ALL local municipal debt:  $1.8 trillion

3)            Social Security unfunded liabilities:  $20 trillion

4)            Medicare unfunded liabilities:  $30 trillion

5)            Unfunded pension liabilities:  $6 trillion

The personal household debt for each individual household is currently $19 trillion (consumer debts, credit cards, auto loans) and this does not include mortgages and student loans – which the Federal Government has guaranteed.  The total debt per household if we were just to pay our federal liabilities is $997,000 dollars.  It may exceed $1 million per household by the time this blog goes to print.

How can we create so much debt?  Ironically, a US balance sheet would look pretty good.  Assets total $149 trillion, debts total $122 trillion, combined with annual revenue of $3.5 trillion……for now, on paper, we are a safe bet for lending purposes.

There is also the matter of the currency – the dollar remains the global reserve currency.  Used in over 60% of all transactions and over 80% in all banking transactions on the planet, the reserve currency status allows us to borrow cheaply and to print money easily.  But This may not last forever – for the last decade adversaries such as China and Russia have been attempting to move global finance towards different currency options or a global currency.  For the first time, allies such as Europe are now helping in this regard.  The world will change, and so will your retirement portfolio, in ways we cannot imagine if they are successful in replacing the dollar’s reserve currency status.

But being credit worthy to borrow is not the same as being able to pay.  Current budget projections do not show us managing, or paying down debt, but increasing it.  Ominous headlines include notes in your annual social security statements which read:

“…by 2034, payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.”

Fixing the debt will require sacrifice and hard work, and it needs to be done now before it is too late.  Spending restraint, entitlement reform, and additional tax reform could go a long way towards reducing deficits, but that is just the starting point.  And that assumes a political will that our leaders have not exhibited in some time.

You should not risk your retirement future on unreliable government promises.  Make sure to contact our office and ask for a financial review from one of our agents…..let’s make sure you are protected from market loss – and government incompetence.

Call now! (877) 912-1919

When have we seen this volatility before?”

When have we seen this volatility before?

The market has seen a prolonged period of volatility over the last several weeks, with more down days than up since September, and a significant decline since November 5th, the last major high we saw on the Dow at 25,989. When have we seen this type of volatility before?

Many market analysts have been reporting this is a likely a correction, a bear market warning signal, or signs of another 2008-style collapse.

To answer that question, the data paints an interesting picture:

I. Top 3 reasons the market volatility is not a cause for concern:

  1. “VIX is operating in a narrow range”: The volatility index, known as the VIX, shows how volatile stocks are trading. At the time of writing this blog, the VIX was around 21 … the historic average is 20.  Not exactly tremors of a market melt-down.  Surging VIX data sometimes represents buying opportunities or the market searching for a trend line.  In either case, it is not necessarily a call for a bear market.  In the summer of 2008, the VIX was averaging a 19 and we were already in a recession.  In 2000, the VIX was averaging a 22 before the broad market declines of the dot.com bubble burst.
  2. “Credit market stress having a greater impact”: Credit market stress and the pricing of debt due to recent rate hikes by the Fed have influenced stocks more than volatile trading. We have never had a policy environment of zero interest rates for 8 years, and then raising them from zero in such a short period of time.  There is no historical record to compare it to.  Congress changing hands has also had an impact. Congress cannot implement new policy, but they sure can hinder implementation of existing policy.  Markets are reading this information – volatility is not the issue – a downward turn in the markets due to increased borrowing costs is one of many.
  3. “Retail sales setting records”:  Cyber Monday was the biggest sales day in US history, topping $7.9 billion … this was on top of the $6.2 billion in sales on Black Friday.  The combined weekend numbers were 20% higher than 2017 and support an ongoing narrative on Wall Street – the US consumer is driving, sales, profits, and in turn – markets.  The 3.5% third quarter GDP number should be higher by the time 2018 wraps up.

II. Top 3 reasons the market volatility IS a cause for concern:

  1. “Stock market ‘down days’ have not been this bad since the ‘08/’09 crisis”: Stocks have moved 1% or more 50 days this calendar year – significant volatility not seen since the 2008-09 financial crisis. Five of the top ten all-time single day record losses have occurred this year in 2018, including the top three all-time daily losses ever, and two of the top 20 occurring this past month of November.  This data suggests volatility is an understatement.
  2. “Volatility worse than 2015 Chinese yuan devaluation”: In August of 2016, the VIX spiked to 40.75 and remained in the 23-25 range in the fall and winter. The Chinese began devaluing their currency without public notice and traders were caught off guard.  Doom and gloom were all the rage … markets took six months to find their bottom … and then, as we know, the market proceeded to continue its historic rise.  And that is the whole point – 2008, 2010 flash crash, Chinese devaluation … we have seen volatility before that has not pushed us into a bear market, we are obviously due for that correction.
  3. “2018 most volatile year for markets since … 2009”: When have we seen markets this volatile before???  Exactly, 2009, the second calendar year of the financial crisis.  As stated above, the VIX before the crisis was moving within its traditional range, so not a predictor of trouble ahead per se.  But once the crisis had hit and was in full force and effect, the VIX shot above 80 and remained in a range of 50 for much of 2009.  According to MarketWatch, compiling data since 1980, 2018 was the third most volatile over the last 38 years.

Data can be used to make an argument one way or another.  There is only one way to not have to worry about market shifts – and that is through having your money in principal protected products in the first place. If you want to have your money protected against market losses and growing at the same time, give us a call. (877) 912-1919

Even with spiked volatility and the inevitable business cycle expectation of a stock market correction, the economy itself continues to hum along!

What Keeps Us Awake at Night…

We never hide our excitement for this economy.  Even with spiked volatility and the inevitable business cycle expectation of a stock market correction, the economy itself continues to hum along!

Wall Street is certainly overbought – a decade of bad monetary policy and government over-regulation gave us an artificial increase in our portfolio, without any job growth, wage growth or economic growth.  This means inevitably we will see market reversals.

But the economy itself – Main Street, NOT Wall Street – is as strong as it has been in decades.  Every month continues to bring positive, real growth numbers.  Consider:

1)  3rd Quarter GDP at 3.5% … annual growth rate above 3% for the first time in years.

2) Unemployment is at record lows – +3.7% .. the lowest since 1969!!!

3)  Wages are growing for the first time in a decade, +3.1% year over year, and are still in positive territory after adjusting for inflation.

4) There are 7.1 million job openings, but only 6.2 million available workers at the end of the 3rd quarter.

With all this great news, what possibly could keep us up at night?  As stated many times, the economy has not looked this good since the Reagan era!

Here are the 3 big economic issues that are keeping us awake at night:

1.“US-China conflict is getting hotter by the day”:   China’s military is war-gaming nuclear attacks against the US homeland … Trump is threatening tariff’s on ALL goods coming from China if a deal isn’t struck … markets are influenced by news reports because traders react to the daily headlines and move client money based upon short term information.  The expanding GDP is benefitting from corporate profitability, which will be impacted by changes to the US-China trade relationship.  This is a high-stakes game Trump is playing with China, one we are built to win, but could still take a whole lot of damage along the way.  Make no mistake, this administration is forcing the US and US companies to disengage from China – the outcome remains unknown.  Markets hate the unknown.

 2.“Does the Fed know what it is doing?”  We have supported here in our blog the Fed raising its benchmark rate for years.  When they finally officially ended their zero-interest rate policy (ZIRP) in 2015, and began raising rates, we applauded.   Raising rates and strengthening the dollar is what we argued for, and we believe is a strong move for a healthy economy.  But further rate hikes could be the cause of the correction and could tip the scales from a mild down-trend to a massive sell-off.  Stocks have already lost technical momentum, falling below their 200-week moving average.  The Fed’s new desire to increase rates despite changes in the environment could prove fool-hardy in the long run.

3.“Europe moves against the dollar”:  Such sentiment would have been unthinkable just a decade ago, but while Trump gets pilloried in the mainstream press for his “America First” mantra, he is usually proven right by global events.  Such an event was the most recent European move to create a dollar-less payment facility to allow European corporations to still do business with Iran and help circumvent US sanctions.  The result will be an entity that can accept non-dollar payments on one end, and convert money into dollars on the other side of the transaction, or even preferably, into Euros.  Fellow Western countries, allies, NATO countries seeking to circumvent US security policy in this manner would have simply been unthinkable until recently.  Yet that is where we are.  Never missing a chance to stick it to us, the Russians and Chinese jumped in with full support behind this new payment facility.  Whether it will work remains a question mark … if it does work, what European countries or businesses will be willing to risk losing the US market? Probably zero. But combined with Saudi moves on the dollar from this past spring, and other global players wanting out from under US financial control – this European move has opened some eyes as to what  future dollar-less world could look like.

Halloween has just passed – lots of treats have come our way in the last two years … but there are some tricks that could serve as headwinds if we don’t avoid them.  A business cycle correction we are due for – an epic bear market reaching crisis level risks will happen if we are not mindful of those risks, some of which we have mentioned here.  That is what keeps us up at night.

You can sleep much better if your portfolio has invested in principal protection products…call now!!! (877) 912-1919