Monday, February 12, 2018

Weekend Reads

Quiz time!

If you remember, way, way back to the days just prior to the Great Recession, you'll recall that the global boom in housing was a primary driver of global debt growth.

In 2007, global debt (households, corporations and governments) totaled $142 trillion.  Ten years later, now that we've learned the error of our ways, where do you think global debt stands today?

A) $127 trillion
B) $150 trillion
C) $165 trillion
D) $217 trillion

The answer at the end of the post.

Things played out about as expected last week - a bounce then a swoon and some wild Friday trading to close out the week.  What concerns me is that the markets started their move higher Friday on the assumption that the central banks were going to step-in over the weekend.  While the Chinese basically said that selling is frowned upon there was very little chatter from the Fed and ECB.  My suspicion is that stocks are likely to get whipped around more here in the near-term.  Up and down 200 points on the Dow used to be a real move, but today that happens in 3 minutes (for example, the Dow was up almost 400 points when I started this post and it's now up just 200 in the blink of an eye).  I'm not offering any advice and I think we will see a number of 5-10% up and down moves in the market in the coming weeks.  Beyond that, the outlook is more muddy because interest rates remain an issue that the market is going to have to contend with soon.

I think it is incredibly foolish to make predictions on 10 year budgets for the Federal Government because so many of the inputs can change dramatically in a very short period of time.  Remember in the 1990's when we were forecasting budget surpluses for a decade?  Well, then 9/11 happened, we entered two decades of war, 2 recessions and poof we're $20 trillion in the hole.

Having said that, there are some things that are not subject to economic variances - these include changes to the tax law that was enacted last year.  I appreciate this article from the Wall Street Journal that highlights what the tax law means for the Federal Government based solely on the law.

One of the big flaws with this type of analysis is that it assumes companies maintain the status quo.  For example, if a company is structured like this and we make these changes to the law, their taxes go up or down.  However, companies are already scurrying like mad to reverse anything in their structure that will make their taxes go up and they have a lot more avenues for lowering their taxes, so you can guess how this will end up.

Okay, so there are a lot of flaws with this chart (namely, the focus on the Dow) but let's ignore that for a moment, because it raises a really important question --- What if the 40 year era of lower and lower interest rates in the US is finally coming to an end?  What does that mean for an economy built on low interest rates?  My biggest concern for some time is that we may enter a period where the Fed is unable to control interest rates as the bond market pushes them higher.

Answer to the previous question re: Global Debt - $217 trillion as of Jan 2017 (we should get an updated number for 2018 soon).  The bulk of the debt growth occurred in Governments and Corporations.  Importantly what did all that $75 trillion of extra debt buy us over the past 10 years?  Just a measly $18 trillion of GDP ($57 trillion to $75 trillion) because as I've pointed out before, this latest round of debt growth has done little to enhance the long-term operating outlook for the globe.


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