Testy Tuesday – Indexes at Inflection Points Ahead of the Fed

Drifting along:  

35,000 on the Dow, 4,500 on the S&P and 15,500 (not yet) on the Nasdaq. All of them are around 10% off the all-time highs and earnings are about 15% below the all-time highs – so that seems fair but the problem is the earnings have been concentrating since Q4 of 2021 – into the hands of our new Tech Gods – where would we be without them? 

In Q4 of 2021 we had massive Government stimulus boosting earnings and, as I noted recently, we still have massive stimulus as the Government is spending $2Tn it doesn’t have to boost the economy this year alone. That’s 10% of our GDP! So, when you look at these earnings and you pay these prices – you are relying on the Government to continue running 10% deficits in order to prop up your investment. What if they don’t?

It is such a ridiculous joke to see these politicians on TV talk about fiscal restraint and not giving “handouts” to the poor when we’re handing out $5,500,000,000 EVERY SINGLE DAY to Corporations and the Rich (including the Investor class as our stock all benefit) to prop up the economy and it’s STILL not enough as earnings are slipping for non-AI companies. 

Can you really look at this chart and believe what we are doing is sustainable? We considered the deficit to be a major crisis in the 1980s and 1990s and in 1998, the year Clinton had his first surplus, the entire National Debt was $5.47Tn – we do that in two years now!  To be fair, our GDP was $9.1Tn at the time and now it’s a very-inflated $25Tn (2.75x) so 2.75 x $5.47 is $15Tn if we compare inflationary apples to apples.

Still, we’re now at $32Tn apples worth of debt – up over 100% from where we were in 1998 (25 years) and our GDP is only $25Tn, which is up 60% so our Debt to GDP Ratio – adjusted for inflation, has gone from 60% to 128% in 25 years – DOUBLE! And we’re adding 10% each year so we’ll be up 100% more by the end of the decade.  

If this were a company you would drop it like a hot potato, wouldn’t you? What sort of questions would have have for the CEO and CFO at a conference call?  I asked Warren to do just that:  

Alexander Hamilton: As one of the Founding Fathers and an advocate for a strong federal government, I understand the importance of debt for a young nation. However, the current level of debt is staggering. How can you reassure our creditors and the public that we have a credible plan to address this issue?

President Biden: Your concern is well-founded, and we recognize the urgency of the situation. While we have implemented measures to address the debt, we acknowledge that more must be done. We’re committed to a comprehensive fiscal plan that combines revenue generation through tax reform, targeted spending reductions, and prudent debt management. We are actively engaging with our creditors to maintain their trust and confidence in our fiscal stewardship.

John Maynard Keynes: While I appreciate your commitment to managing inflation, we must also consider the impact of this debt on future generations. How can you justify such a massive debt burden for our children and grandchildren?

Secretary Janet Yellen: Your concern about future generations is shared by all of us. We understand the gravity of the debt burden we’re leaving behind. Our strategy involves not only managing inflation but also implementing structural reforms that can promote economic growth. This includes investments in renewable energy, education, and innovation. We are actively exploring ways to reduce the long-term impact of the debt on future generations, including strategies to gradually reduce deficits as economic conditions permit.

Milton Friedman: I’ve always advocated for limited government and free markets. How do you justify such significant government intervention in the economy, particularly through continuous deficit spending, especially in a high-interest rate environment?

President Biden: I respect your commitment to free markets. The current economic landscape has required government intervention to prevent crises and support our citizens. We understand the importance of fiscal responsibility, especially as interest rates rise. To address this, we are actively working on a plan that includes targeted spending cuts in non-essential areas while safeguarding critical programs. We are also exploring ways to stimulate economic growth and increase revenue without compromising our principles.

Janet Yellen: Mr. Friedman, I appreciate your perspective. We share the goal of responsible fiscal management. As we navigate the challenges of rising interest rates, we are looking at options to reduce our reliance on deficit spending. This includes evaluating tax policies and considering innovative financing methods to minimize the impact of our debt service obligations.

Robo John Oliver: In the world of satire, these deficits are almost comically large. How do you respond to critics who argue that your approach is akin to robbing Peter to pay Paul, and that these deficits are unsustainable over the long term?

President Biden: We appreciate the humor, but we take the issue seriously. We understand the concerns about long-term sustainability. That’s why we’re actively engaged in developing a comprehensive plan that addresses both immediate needs and long-term fiscal responsibility. We’re open to constructive criticism and are committed to finding practical solutions that don’t burden future generations.

Janet Yellen: We acknowledge the gravity of the issue. We are actively seeking input from experts and economists to refine our approach. Sustainability is a top priority, and we are determined to find a path that ensures a stable fiscal future for our nation.

Since that seemed to have the same result as all press conferences, I asked Warren to invite Friedman, Keynes and Robo John Oliver to lunch:

Alexander Hamilton: Well, that was quite the disappointing exchange. It seems that while they acknowledge the problem, there’s no concrete plan to address it. The debt keeps growing, and it’s hard to see how this is sustainable.

Milton Friedman: I couldn’t agree more, Hamilton. The government’s intervention and deficit spending are off the charts. With interest rates on the rise, this could spell disaster. We’re essentially robbing our future to fund the present.

John Maynard Keynes: Indeed, it’s disheartening. We need solutions that strike a balance between stimulating the economy and fiscal responsibility. If we continue down this path, the consequences could be dire. Inflation could spiral out of control, and our creditors might lose faith.

Robo John Oliver: It’s comical how they dance around the issue. I mean, they’re handing out massive stimulus packages and running deficits like there’s no tomorrow. But where’s the clear plan to get us out of this mess?

Alexander Hamilton: The consequences of failure are severe. A debt crisis could lead to skyrocketing interest rates, a devaluation of the currency, and ultimately, economic turmoil. Our reputation as a responsible debtor nation could be tarnished.

Milton Friedman: Perhaps we should consider alternative solutions. Tax reform, spending reductions in non-essential areas, and incentivizing private investment could be part of the answer. We need to encourage economic growth without relying solely on government intervention.

John Maynard Keynes: Agreed, Friedman. We can’t ignore the need for investment in critical areas like infrastructure and education. But it has to be balanced and accompanied by responsible fiscal management.

Robo John Oliver: And we should hold them accountable. Maybe we, as public voices, need to push for transparency and real solutions. They need to hear that their magical thinking won’t cut it.

I was hoping that exercise would dig up some ideas but, honestly, it’s more of the same, isn’t it? It’s the same as Global Warming – just PRETEND to work on the problem as it gets worse and, eventually, it’s so bad that there’s nothing to do but wait for it to end us all.

Happy Tuesday!