Market and Economy

Diligence is the mother of good luck

Benjamin Franklin

 

Building Benjamins

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.

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Building Benjamins

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.

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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.

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Building Benjamins

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.

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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.

Read More »
Building Benjamins

Economic and Market Review December 2023

• The Federal Reserve raised interest rates eleven times between 2022 and 2023, culminating in a 5.5% Fed Funds rate.
• Despite global efforts to reduce reliance on oil, the U.S. set a new record in oil production in 2023, maintaining its position as the world’s largest oil producer.
• The recent global trend of increased interest rates has led to a higher cost for governments to issue debt. As a result, countries like France, Japan, and South Korea are pivoting towards raising taxes as an alternative to accumulating more debt.
• A historical analysis of market performance during election years shows that political parties have little impact on market dynamics, with a variety of factors influencing presidential elections and subsequent economic policies.

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Building Benjamins

Economic and Market Review November 2023

Economic and Market Review November 30, 2023 Equity Indices YTD Return Dow Jones 8.46% S&P500 18.97% NASDAQ 35.92% MSCI – Europe 11.19% MSCI–Emerging 3.21% Bonds Yield 2yr Treasury 4.37% 10yr Treasury 4.37% 10yr Municipal 2.68% U.S. Corporate 5.51% Commodities Price Gold $1982.64/oz Silver $22.76/oz Crude Oil $71.10/barrel Currencies Rate CAD/USD

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Video: Financially Stretched Consumers Set to Cut Back Spending

• We are avoiding retail stocks like Amazon (AMZN), Target (TGT), Lowe’s (LOW) and Wayfair (W).
• Also avoiding consumer discretionary stocks like Tesla (TSLA), Carvana (CVNA) and consumer finance stocks like Capital One (COF), Discover (DFS) and Affirm (AFRM).
• Over 51% of Americans now carry a balance on their credit cards each month, a 27% increase since 2018.
• As of October, 28.9% of banks reported tightening standards for consumer lending, a leading indicator of potential recession.
• Delinquency rates across all non-mortgages have surpassed pre-pandemic levels, with a sharp increase observed in the September quarter, particularly among younger consumers.
• Student loan pause added $260 billion in consumption, accounting for up to 0.8% of monthly consumer spending. The pause ended on September 1.
• The average interest rate on credit cards has soared to 20.72%, with rejections for scores under 700 hitting over 50%.

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Financially Stretched Consumers Set to Cut Back Spending  

• We are avoiding retail stocks like Amazon (AMZN), Target (TGT), Lowe’s (LOW) and Wayfair (W).
• Also avoiding consumer discretionary stocks like Tesla (TSLA), Carvana (CVNA) and consumer finance stocks like Capital One (COF), Discover (DFS) and Affirm (AFRM).
• Over 51% of Americans now carry a balance on their credit cards each month, a 27% increase since 2018.
• As of October, 28.9% of banks reported tightening standards for consumer lending, a leading indicator of potential recession.
• Delinquency rates across all non-mortgages have surpassed pre-pandemic levels, with a sharp increase observed in the September quarter, particularly among younger consumers.
• Student loan pause added $260 billion in consumption, accounting for up to 0.8% of monthly consumer spending. The pause ended on September 1.
• The average interest rate on credit cards has soared to 20.72%, with rejections for scores under 700 hitting over 50%.

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Video: Inflation Eases, But Are We on the Brink of a Debt Disaster or a Consumer Recession?

• Core CPI has slowed to 4.0% year-over-year.
• Unexpected inflation is somewhat beneficial for the federal deficit, which is critical given the nearly $1.7-2 trillion deficit and the $34 trillion existing debt.
• Consumers face challenges with rising credit card delinquency and upcoming student loan payments, potentially leading to a weaker 4Q23 in GDP terms
• In the September quarter, government spending was a major component of economic expansion.

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Building Benjamins

Economic and Market Review October 2023

Economic and Market Review October 31, 2023 Equity Indices YTD Return Dow Jones -0.28% S&P500 9.23% NASDAQ 22.78% MSCI – Europe 1.38% MSCI–Emerging -4.31% Bonds Yield 2yr Treasury 5.07% 10yr Treasury 4.88% 10yr Municipal 3.64% U.S. Corporate 6.08% Commodities Price Gold $1992/oz Silver $22.96/oz Crude Oil $81.36/barrel Currencies Rate CAD/USD

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Video: Interest Rates are Confusing Investors. 5% Yield for the 10 and 30 Year US Treasuries. What Now?

• The Federal Reserve influences short-term interest rates through the FFR (Federal Funds Rate) which currently sits at 5.33%.
• Short-term rates affect long-term interest rates over time by impacting borrowing costs, economic activity, and inflation, which in turn affect nominal GDP.
• In a Nominal GDP environment of 6% growth, a fair yield for 10 and 30-year Treasuries is historically around the 6% mark.
• With a federal deficit of nearly $2 trillion annually, interest expenses will be near $1 trillion as rates adjust upwards, and supply of bonds surge.
• QT makes the Fed a net seller of bonds.
• Concerns about sanctions and a ballooning US budget deficit are leading global buyers to reduce US dollar and treasury holdings, favoring gold or other assets instead.

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