Going Down
Next week is the big Fed rate cut decision, so this was the last week of data to influence that decision. In our view, the data this week was not bad enough to call for a 50 basis point cut (bps are basis points and a basis point is 1/100 of a percent) but as the week ended, ‘Fed Whisperer’ Nick Timiraos of the WSJ, hinted at a 50bps cut. Anything is possible, but there is a messaging risk in a 50bps cut as it might imply that the Fed is worried that they are late in starting the rate reductions. The stock market could interpret that as a ‘panic’ maneuver. In terms of real economic impact, 25bps or 50bps makes little difference.
The old Wall Street adage is you buy the rumor and sell the news. The market has been buying the rumor since late October of last year when it first sniffed the potential for rate cuts. In that time, the S&P 500 Index is up about 35%. Of course, adages are never right all the time, so now that the rumor is about to become the news, we’ll be watching to see if the old adage holds this time around.
The Trillion Dollar Issue That Did Not Make the Debate Stage
Back in the old days, Republicans were the party of fiscal prudence and the Democrats were the big spenders. Those days are long gone. From a fiscal perspective, there really is not much difference between Republicans and Democrats – both are driving ever rising fiscal deficits.
One of the economic oddities of the last several years is that U.S. is running a growing fiscal deficit during a strong economic period. Economic theory would suggest that deficits are run when economic times are hard in an attempt to pull the economy out of recession. Likewise, when the economy is growing, fiscal surpluses would be the norm and these surpluses would create the buffer for the next recession – i.e., the rainy day fund.
The latest fiscal data was released on Friday and it was more of the same… much more. The deficit for the month of August was $380 billion – ouch. The calendar makes that number look a bit worse than it actually is, because the September 1 pay date for a variety of items, such as Medicare and Social Security, fell on a weekend, so the payments were accelerated into August. Nonetheless, the deficit continues to grow by leaps and bounds.
Gross interest expense (that is, interest on government bonds) crossed the $1 trillion mark for the 2024 fiscal year that ends in September. Interest on the outstanding bonds is now the second largest spend category behind Social Security.
The presidential campaigns may argue about which side is the bigger spender, but in reality, it matters very little. Both sides, if allowed to implement their agenda, will oversee large continuing fiscal deficits. The Biden and Trump deficits are already the highest since FDR and there is no reason to expect that trend to reverse with the next administration.
The expected interest rate reductions over the coming months and quarters will help to slow the progress of the increase in interest expense, but after a long period of close to zero short term rates, even 2% rates will continue grow the interest expense.
Our point is simply this, debts must be paid or there must be a default. Default is not really an option. That would destroy the dollar and our economic system. It is far more likely that the government would simply print more money to pay the debt rather than default.
That brings us to the two ways to pay for the debt. The best way to pay for our growing debt burden is to foster economic growth. Growth produces more income, more income produces more government revenue. But to make a difference, we need much stronger growth than we have experienced for quite some time. That means that whatever the country spends, needs to be spent wisely, that is, on productive projects. Money spent on unproductive activities is dead money and only makes matters worse.
The other alternative is the money printing alternative. Printing more money may appear to work for a while, but that process is destined to end in failure, more specifically inflation. Although rumblings about continued large fiscal deficits are rarely heard these days, the issue is not going unnoticed by markets, even if it is unnoticed by most. All the talk this year has been the rise of the stock market, but gold is the top returning asset class thus far in 2024 with a return of roughly 21% as opposed to the S&P 500 at about 14%. As long as deficits continue to run wild, we would expect gold to continue to perform well.
Have a great week!
What We’re Reading
August PPI Rises 0.2%, Core PPI Exceeds Expectations at 0.3%
Why U.S. fiscal policy will matter even more after the election (pdf)
Jamie Dimon says ‘the worst outcome is stagflation,’ a scenario he’s not taking off the table
Trump’s plan to end taxes on Social Security income is a ‘fatal mistake,’
2024 Presidential Election: Harris vs Trump Policy Comparison (pdf)
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All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
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Economy, Federal deficit, Inflation, Interest Rates, S&P 500, Stock Market, TreasuriesBy: Adam
