Market and Economy
Diligence is the mother of good luck
Benjamin Franklin
Economic and Market Review September 2024
• Equity markets have strong year-to-date returns, with the S&P500 having its first positive September in 5 years.
• Gold and silver surge amid continued economic uncertainty and global conflict fears.
• The Fed’s 50bps rate cut spurred a market rally, but economists are split on whether it signals an over-correction.
• China’s economy struggles with deflation, prompting the PBOC to introduce aggressive stimulus measures aimed at boosting GDP to 5% by 2024.
• The U.S. faces growing debt concerns with interest payments projected to exceed $1 trillion by 2025.
• Major dockworkers’ strike threatens to disrupt supply chains further.
Economic and Market Review August 2024
• Stocks rebounded from a 10% correction in August, but the market may be overestimating the likelihood of aggressive Fed rate cuts.
• The number of banks on the FDIC’s ‘problematic list’ is increasing, with several facing unrealized losses in excess of 100% of tier-1 equity.
• The US economy shows signs of recession, with unemployment triggering the Sahm Rule, and consumer spending outpacing personal income, despite steady GDP growth.
• Gold demand is rising as central banks increase purchases, driven by concerns about inflation.
• Market concentration remains high, with growth sectors dominating global market capitalization, even as valuation metrics suggest overvaluation similar to the 2000 dot-com bubble.
Economic and Market Review July 2024
• Fed left rates unchanged once again, though said that “some further progress” had been made toward the 2% inflation goal.
• While the labor market seems to be weakening, with unemployment rate jumping to 4.3%, inflation is still sticky at 3.0% — the same place it was in June 2023.
• Treasury markets are becoming less liquid, with excessive deficit spending driving up aggregate issuance, with little extra demand.
• 2023 was the worst year on record for property insurance companies, with a more than $15.2 billion underwriting loss.
• Retirement balances have lagged the population’s age, with the BLS projecting more people 55+ continuing to work past the retirement age.
Economic and Market Review June 2024
• Equities hit all-time highs, led by large-cap stocks, with 61% of S&P 500 returns coming from the “Magnificent 7” megacap tech stocks.
• The Fed remains cautious about interest rate cuts, needing more sustainable inflation reduction, while unemployment claims reached a two-year high.
• Despite muted gasoline demand thusfar, strong energy demand from record heat and the projected strongest travel season since before the pandemic saw crude prices broadly higher.
• Mortgage rates are still at their highest since 2001, muting demand and causing increased supply in the housing market.
Economic and Market Review May 2024
• GDP saw a substantial down revision, to just 1.3% quarter over quarter annualized compared to the previously reported 1.6%.
• Consumer spending on durable goods has seen the weakest results since the quarter ending September 2021, and the first contraction since early 2020. Consumer spending on durable goods is often considered a leading indicator of recession.
• The Social Security Trust Fund is now projected to last until only 2033, a year earlier than the 2020 projections.
• If interest rates stay stable for the remainder of the year, the US will pay a total of $1.7 trillion in interest through April 2025.
• Since the beginning of the year, China has offloaded $53.3 billion in US Debt, replacing it with gold.
Video: Is Your Portfolio and Retirement Safe from the Devasting Damage of Inflation?
• Investors need to be aware that inflation damage compounds over time. We have undergone a secular change, and inflation will continue to move up over the medium term.
• Inflation has slowed from its 9.1% high in June 2022, but it has reaccelerated to 3.5% from the 3.0% low in June 2023.
• If you had $1,000,000 in cash in March 2021, the purchasing power of that would only be $848,445.
• Federal government spending is out of control, which has continued to fuel inflation. Driven by increasing interest expenses and spending, we expect a $2 trillion deficit for 2024.
• The Fed has been complicit. The balance sheet ballooned from $872 billion before the 2008 financial crisis to $8.9 trillion in April 2022. QT has made a dent, but it still sits at $7.4 trillion.
• Nominal GDP, 10-year and 30-year Treasury yield generally move in tandem. Currently, interest rates are below what we would expect.
• Own assets that will do well in an inflationary environment.
• Stocks should do well. We like oil and gold stocks in particular, as they are well-positioned from a supply-and-demand perspective and are undervalued by the market.
• We are avoiding any bond over 5 years in maturity. Inflation eats away at the value over time, and as rates go up, the nominal price of the bond is destroyed.
• Cash-like instruments like CDs and T-Bills with under 1-year maturity are also a good choice.
Economic and Market Review April 2024
• The Federal Reserve maintained interest rates at 5.25%-5.5% during its May 1 meeting, signaling caution due to ongoing inflation concerns despite market expectations of future rate cuts.
• Despite a strong job market, data indicates a slowdown in both layoffs and hiring rates.
• Economic indicators show that GDP growth has decelerated to the slowest pace in two years, with manufacturing contracting and services slowing down despite strong consumer spending.
• U.S. natural gas exports are expected to increase significantly by 2025, with new LNG export terminals boosting capacity, even as domestic consumption adjustments are influenced by milder weather and over-storage issues.
Economic and Market Review March 2024
• The S&P 500 has seen a 25% increase over the past five months, a run up only seen 10 times since 1930.
• The bond market is experiencing its longest yield curve inversion on record, with the 2-year to 10-year spread inverted, indicating potential negative economic and financial market activity.
• The era of excess consumer spending driven by pandemic savings is waning, with less than $30 billion of the peak $2.1 trillion in savings remaining.
• Global debt has reached a record high, with emerging markets facing increased debt distress due to high borrowing costs and a strong US dollar.
Economic and Market Review February 2024
• The Congressional Budget Office reports that interest expense on federal debt will surpass defense spending and Medicare in 2024, raising concerns about the government’s ability to manage the impending debt crisis.
• Despite a drop in US jobless claims and high job openings, labor force participation remains lower than pre-pandemic levels, contributing to a labor shortage that has pushed up labor costs across industries.
• Stocks have continued to rally, with the “Magnificent 7” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) dominating returns and contributing to a high concentration risk in the S&P 500.
• The ongoing presidential election year adds legislative and political uncertainty to the economic outlook.
US Deficit, Debt, and Interest Expense Begin to Spiral
· Deficit accelerated to $500 billion in the December quarter, on pace for $2 trillion in the 2024 fiscal year ending September.
· Anticipated government debt of $36 trillion by December 2024, excluding significant unfunded Social Security and Medicare liabilities.
· An aging population will transition millions from taxpayers to net Social Security and Medicare beneficiaries, contributing to the looming financial strain (Current Liabilities of $26 trillion for Social Security and $40 trillion for Medicare).
· International central banks are reducing dollar asset holdings due to the weaponization of the dollar with SWIFT sanctions and dollar asset freezes and possible confiscation.
· Responses to the fiscal crisis are challenging. Resuming Quantitative Easing (QE) and debt monetization might lead to hyperinflation and discourage private investment.
· Options to mitigate the fiscal crisis, like cutting services or increasing taxes, are widely unpopular and politically unfeasible.
· Compounding Interest Expense requires the issuance of more bonds to cover higher interest expenses, driving rates even higher.
· This will directly lead to crowding out of the private sector, as higher returns in treasuries pull money out of productive investment. This is already seen with quickly increasing consumer interest rates.
· If the crisis leads to a default, commodities and stocks may become unfavorable.
· If QE resumes, gold and stocks might benefit, although rapid QE and rising interest rates could initially depress stock price-to-earnings ratios before nominal prices recover.
· We are avoiding the long end of the yield curve, as the real purchasing power of long-term bonds will erode from persistent inflation even if nominal values are maintained.
· Short-term treasuries and cash look attractive as well as diversifying assets like reinsurance.
Economic and Market Review January 2024
• Equity markets are near an all-time high, driven mainly by mega-cap stocks, amidst the Federal Reserve potentially making minor rate cuts by year-end.
• Due to geopolitical tensions in the Middle East, container shipping prices have seen a surge, with potential knock-on effects on consumer prices and availability.
• The U.S. economy shows mixed signals with higher-than-expected GDP growth but persistent inflation, while consumer confidence improves but faces headwinds from high credit rates.
• The U.S. federal debt is projected to hit $35 trillion by the end of the fiscal year 2024, with a significant borrowing plan in place.
• Economists are divided on the 2024 outlook, indicating a potential weakening in the global economy and increased volatility.
Video: US Deficit, Debt, Interest Expense Spiral Accelerates into High Gear in the December Quarter
· Deficit accelerated to $500 billion in the December quarter, on pace for $2 trillion in the 2024 fiscal year ending September.
· Anticipated government debt of $36 trillion by December 2024, excluding significant unfunded Social Security and Medicare liabilities.
· An aging population will transition millions from taxpayers to net Social Security and Medicare beneficiaries, contributing to the looming financial strain (Current Liabilities of $26 trillion for Social Security and $40 trillion for Medicare).
· International central banks are reducing dollar asset holdings due to the weaponization of the dollar with SWIFT sanctions and dollar asset freezes and possible confiscation.
· Responses to the fiscal crisis are challenging. Resuming Quantitative Easing (QE) and debt monetization might lead to hyperinflation and discourage private investment.
· Options to mitigate the fiscal crisis, like cutting services or increasing taxes, are widely unpopular and politically unfeasible.
· Compounding Interest Expense requires the issuance of more bonds to cover higher interest expenses, driving rates even higher.
· This will directly lead to crowding out of the private sector, as higher returns in treasuries pull money out of productive investment. This is already seen with quickly increasing consumer interest rates.
· If the crisis leads to a default, commodities and stocks may become unfavorable.
· If QE resumes, gold and stocks might benefit, although rapid QE and rising interest rates could initially depress stock price-to-earnings ratios before nominal prices recover.
· We are avoiding the long end of the yield curve, as the real purchasing power of long-term bonds will erode from persistent inflation even if nominal values are maintained.
· Short-term treasuries and cash look attractive as well as diversifying assets like reinsurance.