Why I have a positive macroeconomic view (part 2)
Regular readers know I've long been optimistic about stocks and the economy – but I also frequently hear a counterpoint from folks on this...
What about America's federal debt? Is our economy driven by unsustainable deficit spending?
So today, I'll pick up where I left off yesterday and give my take...
In yesterday's e-mail, I shared the highlights of the first part of the 74-slide presentation I gave on Wednesday evening at an event hosted by the Harvard Business School Club of New York. Today, I'll continue the conversation with more highlights and slides from the second part of my presentation on my macroeconomic outlook.
It's a genuine concern for many folks that America's economic strength is being artificially inflated by excessive federal government spending.
And there's truth to this: Our gross federal debt is approaching $35 trillion, and has been rising by $1 trillion every 100 days or so over the past year.
Rising debt combined with rising interest rates meant the government paid more than $1 trillion in interest costs last year. That's double the amount as recently as 2020.
As you can see in this chart I precented with data from the Organisation for Economic Co-operation and Development ("OECD"), America's debt-to-GDP ratio is among the highest in the world:
So why am I not predicting a debt crisis that roils markets? I have four reasons:
- The U.S. is an incredibly rich country, with a dynamic and growing economy.
- The dollar is the world's reserve currency.
- Japan's debt-to-GDP ratio was at our recent level of 144% way back in 2001 and has been above 250% for the past four years. And to just about everyone's surprise, Japan still hasn't had a debt crisis – a strong indication that we're far from that point today.
- Our government has the ability to increase taxes. As this chart I shared shows, our tax-to-GDP ratio (recently at 26% a few years ago and now closer to 28%) has been among the lowest in the developed world:
To be clear, I'm not advocating for higher taxes...
Just like plenty of other folks, I believe our political leaders need to do a better job of running a more efficient government and getting spending under control. I'm simply pointing out that the government has room to raise taxes if that's necessary to avert a debt crisis.
And, to repeat, the U.S. overall is rich. This next chart from my presentation shows that American households have their highest levels of assets and net worth ever:
And while the levels are down a bit from the 2022 highs, American households are sitting on more than $4 trillion of cash. Here's the chart I shared:
Meanwhile, as you can see in this next chart I shared, the value of residential real estate is at an all-time high:
And subtracting out a little more than $20 trillion of mortgage debt, the value of homeowners' equity in real estate is also at an all-time high. Here's the chart I presented:
So, in conclusion, I don't think it's one of those once-a-decade times when you want to get defensive.
The economy is strong, which is a tailwind for stocks. And if it weakens, the Federal Reserve has plenty of room to cut rates – that's also a tailwind for stocks.
And as I've been saying many times over the past year, inflation is likely to remain muted. Meanwhile, valuations are high, but nowhere near bubble territory.
Ah, but what about the election coming up in November? It seems like everyone thinks the world is going to come to an end if their guy doesn't win.
I think the winner of the presidential race will matter a great deal in almost every area – except stocks.
Stocks did great under former President Donald Trump until COVID-19 came out of left field. And stocks have also done great under President Joe Biden.
From the day Trump was inaugurated to the market's February 2020 peak before the pandemic escalated, the S&P 500 Index rose 49%. And from Biden's inauguration through yesterday's close, the S&P 500 is up 41%.
So, as I discussed in detail in my January 24 e-mail, don't let your politics affect your investing:
If you want to be a successful investor over time, you can't let your emotions – which include your political leanings – affect your analysis of economic factors and your investment decision making.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.