Broker Check

Government Spending is Red Hot

February 19, 2024

The strength of the stock market has been surprising over the last few months. We mentioned a few months ago that we thought market conditions were pointing towards a Santa Claus rally. We got that and more and now we have to take a step back and assess. Of course, no one knows for sure when the markets will have setbacks, but we know they will come. We are looking for cracks in the dam that may give us some warnings…

 

One of the big reasons the stock market - and the economy for that matter - have been surprisingly resilient is because of the government. Our Federal Government is spending money WILDLY and it is not just for weapons for Ukraine. The good news is that this spending has supported markets – the bad news is that spending is on the proverbial credit card…

To put numbers on the recklessness is nauseating, but here we go. The government’s fiscal year ends in September. The Treasury’s own website shows the Federal government’s debt as $33.167 Trillion as of the end of September 2023. That number was $34.266 last Friday. So the math is pretty easy – almost precisely $1Trillion in 4+ months which is a run rate of close to $3Trillion for fiscal year 2024. The Congressional budget office is claiming that we will run a $1.7 Trillion dollar budget deficit for 2024 - which is bad enough – but that clearly isn’t true. Here is the truth - we are running a 10% budget deficit. We will wait while you read that again...

This is a visualization of our Federal Government’s budget deficit through the years as a percentage of GDP. These numbers aren’t as bad as they would look if we included the borrowing of Social Security surplus that we did all these years! (there was never a true surplus in the 1990s.) The gov’t spending a bunch of money it doesn’t have isn’t surprising to anyone – and you may even be able to justify running an almost 10% budget deficit after the 2008 meltdown. The problem however, is when you normalize big budget deficits. Take a look…

You see from this picture that the trend is in a terrible direction with budget deficits at huge percentages of the GDP. For a perspective on how bad this really is, keep in mind that the original requirements for countries to get into the European Union was that they couldn’t run a budget deficit that was more than 3% of their GDP. 3% looks squeaky tight compared to the circus we have going on and that was the EU’s worst-case scenario. NOW WE ARE RUNNING UPWARDS OF A 10% BUGET DEFICIT WITH UNEMPLOYMENT LESS THAN 4% AND THE STOCK MARKET HITTING NEW ALL-TIME HIGHS! This is MADNESS!!  But wait, there’s more. To match this insanity on the fiscal policy, now we have monetary policy that has rocketed interest rates higher. This next chart is truly disturbing because it shows our annual run rate on how much the  government has to pay in interest now that the debt and the interest rate are so much higher…

The amount of interest our government has to pay on its debt has gone parabolic. We are north of $1Trillion annually now for interest payments on debt. Quite obviously, this is dangerous to our whole financial system. This has to be reined in or it could spiral out of control. A JP Morgan analyst just put a report out that argues the government over-spending will be reeled back as the amount of $ in the reverse-repo market dwindles. Let’s hope they are correct and we don’t end 2024 with a 10% budget deficit. Hopefully we can avoid a deep recession as well – because if that hits, government spending will be more politically justifiable and we would have a whole new problem. Our government’s reckless spending is THE #1 problem of our financial world – that’s saying a lot!

We can’t predict what politicians will do so focusing on the things that we do have control over – considering that, we need to:

  • First and foremost - Streamline your financial life – eliminate annoying debts especially high-interest credit cards. Check all of your monthly bills because things have changed in cable services, phone lines, insurance costs, etc and you can’t fall asleep at the wheel. We regularly see people both in retirement and while still working that are paying A LOT of money just for the convenience of not have to price things out and tighten things down where necessary!!
  • Reallocate your assets so we are comfortable with volatility. Crazy things may be in store for us in 2024 from the perspective of stock and bond markets – but they may not. The rest of the world is still utilizing our currency and capital markets. Politicians spend public money in election years – so this support of markets may continue. Your portfolio needs to be organized so you can handle some ups and downs.
  • Lock in higher interest rates for longer periods of time because current interest rates are not likely to last. This is particularly effective for the section of your portfolio that you have to withdraw from for living/fun expenses or just for the fact that it is IRA money that you have to withdraw from.
  • Keep speculative assets to a manageable portion of your portfolio. This even includes Bitcoin/Ethereum which typically come up in discussions like this referencing the poor management of our fiscal/monetary system.
  • Understand that gold is not an investment. Gold is money – just a different (and longer running) version of it than most Americans are used to. Everyone should have some. If you want to keep it in your closet for a potential emergency - that’s fine. If you would like an interest return on your gold you can do that too.
  • Continue to learn about the economic and political trends from multiple sources. No one knows what 2024 is going to bring and there will likely surprises to EVERYONE on multiple fronts.

Regards and good investing!

Greyson Geiler