When Economic Fundamentals Conflict with Market Action
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First, an update:
Last year, we at Consilience Asset Management added a Macro-Economic component to our Relative Capital Flow Model*. Using market action, through a process of reverse engineering, we seek to identify which macro-economic climate is being represented in the market at any given time.
This is an important addition to our discipline as central banks across the globe are attempting to unwind decades of monetary expansion. As this unwinding occurs, it could have significant ramifications for the financial market. Thus, there is an increased need to monitor this process and the corresponding macro-economic result.
Below are the ratings of securities in the five scenarios that we are monitoring:
Inflation – Negative,
Deflation – Negative,
Stagflation – Negative,
Recovery – Neutral,
Financial Crisis – Negative.
The above scenarios reflect the current Capital Flow* composite rating of the securities that have historically generated positive returns in the above economic environments.
In addition, our Global Macro Indicators* are as follows for the seven asset classes we invest in for our clients:
Global Equities – Positive,
Global Bonds – Neutral,
Commodities – Neutral,
Gold – Neutral,
U.S. Dollar – Neutral,
Real Estate – Neutral,
Cryptocurrencies – Neutral.
Now, to this month’s report:
Whoever is in the White House in 2025 will be faced with the same dilemma… too much debt… debt that is increasing by the second and must be financed.
Who will continue to lend to a nation with over 120% debt/GDP? And if they do, at what rate?
And both parties bear responsibility after 50 years of unrestrained money printing!
According to Congressional Budget Office’s (CBO) latest report, the 2024 deficit will account for 7% of gross domestic product while the 2034 deficit will account for 6.9% of GDP. This will be added to our almost $35 trillion in debt.
At 7% compounded, this roughly means the deficits are expected to double over the next decade.
So, back to the question: Who will lend the US money to finance these rising deficits?
According to the U.S. Department of Treasury, the top two holders of American debt recently accounted for $1.94 trillion in Treasury securities. This is roughly a quarter of all U.S. debt held abroad but just under 8% of the total… a far cry from the high of a 25.4% overall share held by the two countries in 2007, according to Refinitiv data.
So, U.S. debt is rapidly rising as our major foreign buyers are declining. This is not a good combination.
If the U.S. raises interest rates to entice them back to the table, the economy will weaken, and stocks and bonds will suffer. If on the other hand, the Fed prints money to buy the debt, it will risk stoking higher inflation and weakening the dollar’s value.
This is the classic… “between a rock and a hard place” dilemma.
Unfortunately, we didn’t hear anything of substance during the debate from either candidate that addressed this existential threat facing our country.
But hasn’t the economy been strengthening since the Covid outbreak in 2020? Yes, at least statistically. But this is based on the old formula hammered out in the 1930’s where government spending adds to the GDP and cuts subtract from it.
Here’s GDP growth for the past 5 years… from approximately $21 trillion to over $28 trillion.
Now subtract inflation… and GDP drops from $28 trillion to below $22 trillion.
Now add the impact of government spending…
Next add the impact of monetary stimulus…
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