Call Us

561-771-8077

    THE GATHERING DEBT STORM?

    Debt Calculation
    May 11

    THE GATHERING DEBT STORM?

    My children are now in their late thirties to early forties, and for them WWII is something they read about in history class, or saw dramatized by the excellent movie “Saving Private Ryan”, or the HBO Series “Band Of Brothers” based on Stephen Ambrose’s well documented book by the same name. However, for those of us of the Baby Boomer generation, WWII remains a vivid memory of our childhood as grandparents, parents, uncles and aunts, and sometimes extended family members, would often share experiences from that enormous global struggle after the Thanksgiving, or Christmas family dinners. In the case of my family, my father and his five brothers, and my mother’s two brothers all served in WWII, so these holiday reunions around the dinner table were also unspoken celebrations, because all the Adams and Shedd men had served and come home safe, though changed by what they had witnessed and experienced.

    Few Americans these days understand, or grasp the implications the gigantic financial, manufacturing and logistical scale of WWII, nor unfortunately have a comprehension of, or empathy for the estimated seventy million dead. History is after all impersonal unless you have lived through it, or otherwise been touched by it. One day a few years ago I ran across an article, which included the financial cost of WWII expressed as a percentage of GDP, and which remains the all-time high for our national debt. I put the number in the notes function of my I-Phone. During the war years, while the men were fighting in Europe and the Pacific, and Rosie the Riveter was on the manufacturing line building the implements and instruments of war, the United States acquired a debt to GDP ratio of 1.22 according to the article, as a result of our successful quest to defeat the Axis Powers.

    All my life various politicians have decried our national debt assigning to it dire consequences to come, which at this point remain tardy in their arrival. However, a recent query by a former Ga. Tech classmate, and fraternity brother, caused me to take another look at our exponentially growing national debt relative to the WWII all-time high 1.22 debt to GDP ratio. Middle East wars, fiscal irresponsibility on the part of politicians, the financial crisis of 2007-2009 and the resulting Great Recession, and the current Pandemic have caused the national debt to spiral to a level, which is now putting the all-time record WWII debt to GDP ratio at peril of being eclipsed. The numbers I’m sharing with investors today were found on Google, and often were not just a simple number, but a range with footnotes about the methodology used to produce the numbers. The purpose of today’s exercise is not to get into the financial weeds of the calculations, but to give investors a feel for the emerging debt trend, which may finally have reached, or may soon reach, levels so absurd as to finally trigger some of those dire consequences I’ve been warned about all my life.

    According to Google, the national debt stood at 24 trillion (t) dollars earlier this year. The Federal Budget of February 5, 2020 stood at 4.8t on estimated revenues of 3.8t. The debt during the eight Obama years grew by 2.9t, and by comparison within the last 45 days the Congress and Administration have added over 3.0t by unanimous consent with a few trillion more no doubt yet to come. Given that unemployment is trending in the direction of Depression level percentages, the revenue number in the February 5, 2020 budget will likely now trend toward 3.0t as opposed to the estimated 3.8t, even as the national debt is now likely trending toward 30t from the 24t, of just a few weeks ago.

    I ran these numbers past a former mentor, and internationally known financial letter publisher, expressing my continuing concern that a modest return to nominal interests rates of just a few years ago from the current near zero rates could cause debt service on the national debt to consume most of the available revenues of our country. His response, which he has written about in his New York Times best seller, was the debt is unsustainable even without rates rising! Our own Alexander Cooke, a former bond trader, knows a thing or two about rates, and he believes rates have likely bottomed, and will likely edge higher in the years ahead, given the long time cycle nature of interest rates. Ditto for several colleagues in my professional group.

    So what does all this mean? Since the times of Kings and Emperors budget crises have been countered by debasement of the currency. For example, The Romans were known to have diluted their gold coinage with base metals, and over time with ever increasing percentages of the base metals and less gold. In the United States some of us can remember when a dime, quarter or silver dollar, was actually mostly silver. However, history suggests there is a limit to how much a currency can be debased, even the world’s reserve currency, before the only remedy left is default on the debt. Like I observed earlier, I’ve heard about the dangers of a growing national debt all my life, yet our society has continued to prosper, at least for those closer to the top of the wealth pyramid. So, I’m not predicting financial Armageddon, as Alexander and I do not do predictions, an exercise best left to those, which believe they have the requisite tools and expertise to be successful at that most daunting of challenges.

    However, a prudent investor would take note of the current debt explosion happening with the nation’s balance sheet, and the potential passing of the all-time record debt to GDP, possibly during the run up to the election. I doubt setting a new debt to GDP all-time record would not cause some impact on volatility in the bond and stock markets. In normal times, it would be unimaginable for any occupant of 1600 Pennsylvania Avenue to suggest default on the national debt as an option, but these are not normal times. And, the majority leader of the Senate continues to suggest States with budget problems should consider bankruptcy. History suggests that when powerful politicians float controversial ideas, those ideas are actually being considered behind the scenes. States are required by law to balance their budgets, so that ticking sound you are hearing …

     

    TATY   —   A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

    TATY 05/10/2020

    TATY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format.

    TATY finished the week near the caution zone at 127 after lagging the price since the March 23 low. This is abnormal and atypical behavior, which has never happened before. TATY normally exerts a gravity like pull on the price pulling the price higher as the indicator races higher after significant bottoms. In the current case TATY seems to be suggesting the rally off the March 23 is likely counter-trend, and likely to be significantly retraced, or possibly give way to another leg down in an ongoing bear market.

    I had expected that the choice between an emerging new bull trend off the March 23 low, which would suggest an eventual renewed assault on new all-time highs, or a close to expiring counter-trend rally in an on-going bear market, would have been resolved by now. However, in typical fashion the market continues to disguise, and obscure, its true intentions. However, markets must eventually tip their hand, and we can adjust our strategies and tactics accordingly, when decisive evidence arrives. For now, the odds remain favorable that the rally is counter-trend, and is likely to expire short of new all-time highs.

    116

    116

     

    117

    117

    Screenshot 116 (Daily) and 117 (78 Minute) show the struggle between the bulls and bears at the Fibonacci 62% level of the S&P-500 cash index. Given the return of bullish sentiment previously in evidence at the all-time high, and the declining volume as the rally has progressed, the rally appears to be displaying the classic signs of a rally in a developing bear market. The support levels shown below in the quote from last week’s update remain valid. An S&P-500 close below 2800 would be an early warning that the levels shown below may come into play sooner rather than later.

    Fibonacci is at work all the time in nature, and the markets. So I’ve placed a Fibonacci grid over the S&P-500 daily chart to give us some potential reference on where the decline, which began on Thursday, may end during an expected test of the March 23 low. These targets are 2663, 2573 and 2483. Sharp eyed investors will notice right away that the 2663 level is remarkably close to the 2655 support mentioned regarding the NASDAQ 2000-2003 type bear market form, and ditto for the 2483 and 2444 respective levels of the two different bear market forms, or formats. The support surrounding 2483 has been previously tested, making it particularly interesting. The market’s behavior around these key levels, should the price approach them, may be critical in eliminating one of the potential prototypes for the current bear. However, investors should realize that we are discussing the two most likely formats, when more than a dozen are available for the bear to choose from. Even so, the Fibonacci calculations would also likely be close for the bear forms not being discussed. Quote is from the May 1, 2020 update.

    THE BOTTOM LINE

    The weight of the evidence continues to favor the rally in the Dow and S&P-500 being counter-trend, which implies the rallies are likely to expire short of new all-time highs, and then likely test the March 23 low. A continuation of the rally back to new all-time highs remains a possibility, but an unlikely probability given the numerous, and growing, uncertainties being created by the Pandemic, unemployment approaching Depression era percentage levels, the potential for the all-time record of debt to GDP being eclipsed, because of massive CARE rescue programs, and a looming election. The stock market does not like uncertainty, and while the stock market does often discount the future, and looks past the valley to the high ground on the other side, the current valley appears to be of an epic scale, making it unlikely to be quickly discounted, prodigious and unprecedented deficit monetary stimulus notwithstanding.

    Please stay safe!

     

    DISCLAIMER : Optimist Capital LLC, does not guarantee the accuracy and completeness of this report, nor is any liability assumed for any loss that may result from reliance by any person upon such information. The information and opinions contained herein are subject to change without notice and are for general information only. The data used for this report is from sources deemed to be reliable, but is not guaranteed for accuracy. Past performance is not a guide or guarantee of future performance. Optimist Capital LLC, and any third-party data providers, shall not have any liability for any loss sustained by anyone who relied on this publication’s contents, which is provided “as is.” Optimist Capital LLC disclaim any and all express or implied warranties, including, but not limited to, any warranties of merchantability, suitability or fitness for a particular purpose or use. Our data and opinions may not be updated as views or information change. Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such device. The information contained in this report may not be published, broadcast, re-written, or otherwise distributed without prior written consent from Optimist Capital LLC.