FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 19, 2017
Chilton Capital's REIT Composite was up 6.1% last month, compared to the MSCI U.S. REIT Index, which gained 4.4%. Year to date, Chilton is up 6.3% net and 6.5% gross, compared to the index's 8.8% return. The firm met virtually with almost 40 real estate investment trusts last month and released the highlights of those Read More
- National Debt Tops $20 Trillion, Equal to 107% of GDP
- Debt Held by the Public vs. Total National Debt
- IMF: Global Economy Looking Strong in 2017 & 2018
- Global Economy Doing Something It Hasn’t in 7 Years
- Fed Meeting Today, Tomorrow – Change Expected
We touch on several bases in today’s letter that are not entirely related. We begin with the 800-pound gorilla in the room – the fact that the US national debt topped $20 trillion last week. With everything else going on in the world right now, this scary milestone received little attention in the media, but I have some thoughts on the subject.
And there are several other topics I will raise in today’s letter related to the improving global economy that I think you’ll find interesting. We’ll conclude today’s discussion with my thoughts on this week’s Fed policy meeting which ends tomorrow and what we might expect to hear from Janet Yellen & Company Wednesday afternoon. Let’s get started.
National Debt Tops $20 Trillion, Equal to 107% of GDP
The US national debt reached $20 trillion for the first time ever last week after President Trump signed a bipartisan bill temporarily raising the nation's debt limit for three months.
While at Camp David, Mr. Trump signed a bill to increase the statutory debt limit last Friday by almost $318 billion, according to the Treasury Department. Before the bill's passage, the US national debt was sitting at the $19.84 trillion limit. The $318 billion increase raised the US national debt to $20.17 trillion on Friday.
The legislation allowed the Treasury Department to start borrowing again immediately after several months of using "extraordinary measures" to avoid a financial default. The bill passed in the Senate last Thursday 80-17 and in the House 316-90 on Friday. Around $15 billion in emergency funding for Hurricane Harvey recovery efforts was attached to the borrowing measure.
Mr. Trump shocked many Republicans by cutting an unexpected deal with House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer last Wednesday, which permitted the three-month debt ceiling increase in exchange for quick action on Hurricane Harvey aid and short-term spending.
The most important point in the chart above is that our national debt is now well over 100% of Gross Domestic Product. This percentage will only go higher over time due to running budget deficits every year. The Congressional Budget Office (CBO) estimates the deficit for FY2017, which ends this month, will be between $600 and $700 billion.
Debt Held by the Public vs. Total National Debt
As you read other articles about our $20 trillion national debt, you’ll almost certainly see writers who claim that our debt is only about 77% of GDP, not 107% as shown in the chart above. That’s because they only count “Debt Held by the Public,” which as of last Friday was apprx. $14.6 trillion.
What they don’t count is the other apprx. $5.5 trillion of so-called “IntraGovernmental Debt.” This is debt owed to various government agencies and trust funds (including the Social Security Trust Fund) in the form of Government Account Series (GAS) bonds. Some in the media say this is money we owe to ourselves, so it shouldn’t count. To that I say hogwash!
The GAS bonds mature just like Treasury securities and have to be rolled over periodically. More importantly, they count against the debt ceiling. If it’s not real debt, why is it counted against the debt ceiling? So keep in mind when someone quotes only the debt held by the public, they are choosing not to count the other $5.5 trillion currently in intragovernmental debt. In my view and others, this is very misleading.
In closing this discussion on our national debt topping $20 trillion, let me mention that I have been writing this newsletter (in one form or another) for 40 years. In looking back, I would say that my warnings about the national debt have been one of my most common themes. Yet thus far I’ve been wrong. I would never have dreamed we could get to $20 trillion in debt and not be in a depression, but here we are.
For the record, I still believe our massive debt will crush us at some point. The timing is impossible to know, but then again, Japan’s debt is estimated to be 250% of its GDP, versus our 107%. So we should all keep an eye on Japan since the coming debt crisis should hit them first.
We should all keep an eye on interest rates as well. If rates ever normalize (ie – move significantly higher), that could well be the catalyst for debt defaults around the world, the US included. That doesn’t look likely for at least a couple more years.
IMF: Global Economy Looking Strong in 2017 & 2018
The International Monetary Fund (IMF) updated its global growth forecasts back in July and maintained that the developed world is on-track for a strong performance overall in 2017 and a slightly better year in 2018. In its latest World Economic Outlook, the IMF forecasted global economic growth of 3.5% in 2017 and 3.6% in 2018.
The IMF said that it has upgraded its economic forecasts for Japan and China based on stronger than expected performance earlier in the year. The IMF noted that it also may be looking to revise Europe higher in its next report in October since there is evidence of stronger growth in the Euro Area.
On the other hand, the IMF downgraded its forecasts for the US from 2.3% (2017) and 2.5% (2018) to 2.1% for both years. But that was before the Commerce Department reported that US GDP rose by 3% in the 2Q. So it remains to be seen if the IMF will revise its US forecast higher in its next report due out in October.
The bottom line is that the IMF expects economic growth in the developed world of at least 3.5% for 2017 and 3.6% for 2018. One caveat: the IMF report summary that I read made no mention of North Korea and the growing threat of military action in the region; I’m sure that will be addressed in the next report.
Global Economy Doing Something It Hasn’t in Seven Years
As discussed just above, most of the economies in the developed world are picking up steam, and so are most of the companies that make them up – making this the first simultaneous global economic recovery in years. On Wall Street, they are calling this a “global synchronous recovery” with stock earnings per share (EPS) rising briskly across the major regions.
"We expect all the major markets to report healthy EPS growth in 2017. That's the first synchronized upturn since 2010," wrote Robert Buckland, chief global equity strategist at CitiBank Research recently. Buckland predicted that all major markets will report strong earnings growth in 2017.
"That's a big change compared to recent years, when we had various regions and countries moving in and out of EPS recessions," Buckland added. "This eight-year global bull market may be old, but we don't think it is finished," he said. They forecast a 9% return for global stocks over the next 12 months and favor technology, energy and banking stocks.
Most major global equity markets have already posted strong performances for the year in response to this synchronous recovery. In the US, the Dow Jones and the S&P 500 indexes were up over 13% and 12% respectively for this year, and both hit new record highs last week.
American Middle Class is Shrinking, But That’s Good
Liberals like to claim that the middle class is shrinking so we should raise taxes on the rich and redistribute that income to help these people avoid falling into the low-income group earning $35,000 a year or less.
While it is true that the middle class is shrinking, it’s because more and more households are rising into the high-income group earning at least $100,000 a year. Take a look below:
You immediately notice that the Middle-Income group making $35,000-$100,000 shrunk from 53.2% in 1967 to 42.2% last year. Yet most of that shrinkage is due to middle class Americans rising into the six-figure group, not by falling into the $35,000 or less group.
Next, you’ll notice that the High-Income group making $100,000 or more has more than tripled from only 8.1% in 1967 to 27.7% in 2016. This is largely the result of middle class families joining the group.
Oh, and let’s not overlook the fact that the Low-Income group making $35,000 or less fell from 38.7% in 1967 to 30.2% last year. These findings were based on a new Census Bureau report on income and poverty in America released earlier this month.
Most economists agree that the numbers above under-estimate the improvement over the last 50 years because they only consider wages alone and do not reflect other employee benefits.
Over the last few decades, employees have been receiving an increasingly larger portion of their overall compensation in the form of benefits such as health care, paid vacation time, flexibility in hours, improved work environments and even daycare.
Total compensation, which adds these benefits to wages and salaries, shows that earnings have actually increased more than 45% since 1967, according to Professor Daniel Smith of Troy University.
Fed Meeting Today, Tomorrow – Change Expected
The Fed Open Market Committee (FOMC) is meeting today and tomorrow. As I suggested on August 8, the Committee is expected to announce the beginning of the unwinding of its massive $4.5 trillion balance sheet – which consists of US Treasury bonds and notes plus mortgage-backed securities – tomorrow.
Earlier in the year, many Fed-watchers had expected the FOMC to announce its third Fed Funds rate hike at this week’s meeting. Yet back in May, the Fed began to send signals that it had a second priority this year in addition to raising the Fed Funds rate three times.
At that time, the FOMC raised the issue of reducing its balance sheet. This balance sheet reduction will not be done by selling off securities. Instead, it will be accomplished by merely letting existing securities mature and not repurchase them, which it has done for the past eight years.
With $4.5 trillion in existing balance sheet holdings, the Fed has tens of billions in securities that mature each month. The prevailing thought is that the Fed would begin balance sheet reduction by allowing up to $10 billion of securities to mature each month and not replace them with rollover purchases.
Further, the amount of monthly maturities that are not repurchased is expected to rise to around $50 billion a month a year from when the unwinding begins. Eventually, the thinking goes, the Fed would reduce its $4.5 trillion balance sheet to around $2 trillion over the next several years and hold it at that level indefinitely.
What I suggested a few weeks ago is that the Fed would announce the beginning of balance sheet reduction tomorrow at the conclusion of this week’s policy meeting, and hold off on a third Fed Funds rate hike this year until the December FOMC meeting.
That seems to be the plan, but we expect to get more guidance tomorrow afternoon. I’ll keep you posted.
Webinar With ZEGA Financial Next Tuesday 3:00 ET
Register today for a live webinar featuring one of the principals of ZEGA Financial, Jay Pestrichelli on Tuesday September 26th at 3:00 PM Eastern Time. This is a rare opportunity for you to hear directly from Jay about their new ZEGA Buffered Index Growth (ZBIG) Strategy and how they seek to provide upside market exposure when the markets go up, while also using a “buffered zone” to protect against market drops. You will be able to ask Jay your questions at the end of the presentation. This is one webinar you don’t want to miss.
Wishing you well,
Gary D. Halbert
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