While We Were All Focused On The Elections, Some Jarring Developments In Financial Markets
And Numbers Just Out Showing The Federal Budget Deficit Continuing To Balloon Probably Aren’t Going To Help…
Some of you may have noticed (or felt) sharp recent declines in stock prices: first in the technology industry, and more recently in big industrial and defense stocks. The President is blaming those declines on Democrats’ victories in the Midterms, and the potential that means they’ll “harrass” him for the next 2 years. And frankly, that’s probably where he’s going to try to place the blame for anything negative that happens with the economy from now until the next election. Since stock market trends tend to be a combination of fundamentals and storytelling, the President might actually help make it so just by saying it.
But let’s just look at some fundamentals that might have a lasting impact:
• First is the monthly report from the Treasury Department for October 2018, which also happens to be the first month of the 2019 fiscal year. It shows a budget deficit for the month of $100,491,000,000. The Treasury Department extrapolates to estimate a deficit of more than $1-trillion for the entire fiscal year (albeit based on 1-month’s worth of data). The news isn’t all bad: even though the government’s taking in a lot less money from corporations due to the Trump/Republican tax cut, it’s keeping more of it.
So why is this potentially such a big problem? Because in order to finance a deficit that huge, the government has to borrow money to pay for it. And the bigger the deficit gets, the more money it has to borrow. Meaning it likely will have to pay higher interest rates to the investors that are buying government debt. Meaning interest rates in general go up: on mortgages, on car loans, etc. It also means the government has to borrow even more money just to pay the interest on the money it already owes. That’s becoming a huge expense: the Treasury estimates “interest on federal debt securities” will cost $591-billion this fiscal year. That’s only $100-billion and change shy of the entire Defense budget.
So even though the economy is booming, and unemployment is at near record lows, the government’s borrowing at a pace not seen since the last Recession, when the economy was in crisis, GDP was shrinking, and corporate tax revenues had dropped more than 50%.
Also, since U.S. government debt is still considered the safest investment in the world, higher interest rates on that debt puts added pressure on corporate borrowers, and other countries, which then have to raise their rates even higher to borrow money, potentially slowing growth for them by making investments less affordable, and restricting access to capital.
• Oil prices, suddenly are plunging. In a period of about a month and a half, they’ve done a complete 180: going from near 4-year highs to their lowest levels of the year.
Lower oil prices are always a mixed bag, because they’re actually good for American consumers, and help offset rising prices elsewhere in the economy. Trump recently cheered on lower oil prices in a Tweet. And he probably wishes they’d starting falling a week or two earlier so the impact was felt at the consumer level before the election.
At the same time, lower oil prices are often a good leading indicator of deteriorating economic conditions. Because if companies are feeling a pinch, one of the first things they’ll do is cut back on energy consumption.
• The U.S. dollar meanwhile continues to surge. It’s now at its highest level in a year and a half. This could be the most problematic factor for the President. Because it works directly against what he’s trying to accomplish with his trade wars and tariffs. If the dollar gets stronger and stronger, it mitigates the effects of a tariff. For instance, if Trump puts a 20% tariff on something, and the dollar rises 10%, the impact of his tariff is cut in half. It also makes U.S. goods more expensive overseas, so consumers in those markets are even less likely to buy U.S.-made products.
Although that part of it may not be that much of an issue, since as we’ve said before, a lot of the President’s plan for selling more U.S. goods overseas involves giving more foreign governments greater access to U.S.-made military equipment, including stuff they didn’t have permission to buy before. And also encouraging foreign governments who already do have access to spend more on U.S. made military goods. Notice when the President orders France to increase its spending on military protection — to “pay for NATO or not!” — he never says it’s so the U.S. can cut its military spending as a result. Quite the opposite: it’ll be more money for “Space Force” and keeping nuclear missiles in “tip top shape”, meaning incremental benefits for the U.S. military industrial complex, which is one of the few industries that didn’t ship a lot of jobs overseas, because they couldn’t because of national security issues. U.S. military goods are very different than raw commodities, they’re highly specialized items that can’t be purchased anywhere else. So if foreign governments want them, they’ll pay the price.
And there are still many examples out there of capital investment and growth: including Amazon’s decision this week to invest what could be billions of dollars in a “second headquarters” split between Virigina just outside of Washington, D.C., and New York City (along with a smaller facility in Nashville).
And Trump’s touting a report showing “record high business optimism”, which is also considered a leading indicator. Problem is, the article he links to in the Washington Examiner is a wee bit misleading, and the National Federation of Independent Business report it cites, while really pretty good, says on its first page that optimism actually fell slightly last month, with declines in “plans to increase employment”, and less agreement that “now [is] a good time to expand”.