Do Deficits Matter?

There is a lot of hue and cry of going on about raising the debt ceiling. On the one hand, not paying America's contractual obligations would be very bad. On the other hand, is spending out of control and hurting future generation's prospects? Hmm...The Peterson Foundation tracks the U.S. national debt in real time and as of 11:00 am today, it was...

That seems a large number, like a really, really large number. Nearly $100,000 per American. The three main drivers of the U.S. national debt are:

1. Demographics. The U.S. population is aging which puts pressure on the federal budget, in particular on vital programs that serve older Americans like Social Security, Medicare, and Medicaid.

2. High healthcare costs. The U.S. healthcare system is the most expensive in the world, but we don’t really get what we pay for.

3. Inadequate revenues: The U.S. tax system does not generate enough revenues to cover the spending policymakers have enacted. For example, 39 U.S. corporations reaping over $120 billion in profits paid no federal income tax from 2018-2020!

The U.S. debt-to-GDP ratio is now over 100%. That sounds bad, is it though? The chart below (click to enlarge) shows the level of debt of most of the world's countries. If we assume green is good, dark red as bad, well things get confusing. Some of the richest countries in the world have very high debt-to-GDP ratios: look no further than Japan (257%), Italy (157%), U.S. (133%), Canada (116%), France (115%), etc., while developing countries like Afghanistan (9%), Nigeria (32%), Bangladesh (40%), Indonesia (41%), Vietnam (48%), etc. have low debt ratios. Sure, there are rich countries like Norway (42%) and Denmark (42%) with low debt % but also poor countries like Sudan (212%) and Sri Lanka (105%) with high debt %. So the big takeaway is it that there is no strong relationship between debt levels and economic strength.   

In fact, perhaps countries like the U.S. and Canada should be borrowing more. A research paper by prominent economists Jason Furman and Larry Summers determined "that the burden of debt is best measured by annual inflation-adjusted interest payments as a percentage of GDP and that anything under two percent should be sustainable." At present, it is negative...suggesting we should be binging on debt. Savers will effectively pay the U.S. government to borrow. And if nothing else, we should be trying to lock in low interest rates for longer periods. The average maturity of U.S. Treasury debt is just 63 months, so it might be good idea if future bond issues lean into longer duration debt--20 or 30 years.

As long as the money is put to productive use, there should be no issue...growth solves all problems. Of course, the Left, the Right and everyone in between have different opinions on what constitutes good use of money...but at least when real interest rates are negative those decisions should be easier. So, I guess Dick Cheney, of all people, was right?

From Sep Slump to Oct Bump?

U.S. markets are having a tough month down around 4%. And why not, with all the inflation worries, the debt ceiling fight, Evergrande, etc...right? Or it could just be that time of the year. September is historically the worst month of the year as people return from their summer vacations/staycations, the weather gets cooler or everyone gets a little distracted by the return of NFL and the Champions League (who know!). When people look for reasons to sell, they find it. The good news, it usually gets better from here. 

Historically, the markets have made back most of September's losses in October and, on average, continue rallying into year end. In fact, it's not just September, Q3 as a whole, is generally a pretty blah quarter; while Q4 is historically the best! Below are the monthly monthly and quarterly price returns for the S&P 500 going back to 1985. Time to buy the dip...

White is the Coolest Color

It's basic physics that darker colors absorb more heat than lighter ones or, more technically, darker colors absorb more of the different wavelengths of light energy, while white or light-colored objects reflect the light of most wavelengths:

So, many walls and roofs are often painted white in warmer climates to deflect more heat and keep homes cooler. That's a good thing but it's also not enough, particularly when temperatures are rising around the world. Industrialization is contributing to climate change (bad!), but it's also pulled billions of people around the world into the middle class (good!), who now seek relief from that heat by more buying ACs (bad?). See...all those ACs, not so good for the environment. In fact, they may be really bad for the environment, like really, really bad, according to a WEF report:

"...the typical window and split units used in most homes - are set to account for over 130 gigatons (GT) of CO2 emissions between now and 2050. That would account for 20-40% of the world’s remaining “carbon budget” (the most we can emit while still keeping global warming to less than 2˚C above pre-industrial levels - the goal set at the Paris Climate Conference in 2015)."

In other words, if the heat doesn't get us, comforting cooling probably will. Hmm, if only there was an uber-white color we could paint on our buildings. Well now there may be...scientists at Perdue University have developed a type of white paint that reflects up to 98.1% of sunlight. What does that mean? Let the researchers explain:

“If you were to use this paint to cover a roof area of about 1,000 square feet, we estimate that you could get a cooling power of 10 kilowatts,” said Xiulin Ruan, a Purdue professor of mechanical engineering. “That’s more powerful than the central air conditioners used by most houses.”

Whoa! Go on..."typical commercial white paint gets warmer rather than cooler. Purdue says its product repels infrared heat from a surface and reflects up to 98.1% of sunlight. This outperforms 80%-90% of comparable products and beats the 95.5% of sunlight reflected by the researchers’ previous ultra-white paint." It could mean we may not need ACs or at least as many of them in the future. That would be a good great thing because there are already a lot of ACs in the world:

Not to mention, a climate hack like this would be great for everyone's utility bills...a win/win/win. The research team Perdue are looking for backers to commercialize their product...so in the not too distant future these companies could be at the forefront of the climate change fight:

Ronaldo Day at Old Trafford

Or should we say Portuguese Day! Ronaldo had a spectacular return to Manchester, scoring two goals...but it was Bruno Fernandes who had the best goal of all as Man U demolished Newcastle 4-1, despite an impressive equalizer from Javi Manquillo. Oh, and Jesse Lingard's late goal wasn't bad either.

Ronaldo has been a scoring machine as this graphic from the Guardian shows. As a young phenom with the Red Devils over a decade ago, he had a goal-to-game ratio of 0.40, and then, remarkably, over 1.0 in his prime years at Real Madrid. Even more remarkable, he kept his production rate near 1.0 at Juventus in his mid thirties! Let's see what he can do in second spell at Manchester. 

9/11: The 20th Anniversary

The NY Times on Sep 12, 2001:

Some iconic pictures of 9/11 from the NYT, Huffpost, USAToday, WSJ, and FoxNews.

August Score Card: Which Assets Won, Lost?

August is over and summer is almost done...so back to school, back to the office (?), and back to volatility?? September is traditionally the worst performing month of the years for stocks; more on that here. But first, let's recap things for the month that just ended. Deutsche Bank (H/T Zerohedge) has a couple of interesting charts (click to enlarge):

August:

Portuguese stocks had a blistering month, up 9% on the month, with about a third of the gains coming in the last five days. Why? Not sure, maybe everyone in the country loved Ronaldo's move to Man U? More generally, it was a pretty, pretty, pretty, good month for equities. Most of the left side of the chart is dominated by stocks, developed and emerging markets alike. In fact, global equities advanced for a 7th consecutive month, with the S&P 500 (+3.0%) and the STOXX 600 (+2.2%) both recording solid gains. On the other hand, the right side of the chart is populated by commodities. Copper, Brent, Silver and WTI were all down 2%-7% on the month, probably due to concerns over slowing demand in China and a stronger dollar.

YTD:

But if you've long commodities, it's still been a great ride so far, particularly for oil speculators. Oil started the year at around $48/ barrel and is now at $69/ barrel and remains the top performer among the major asset classes on a YTD basis, with WTI and Brent crude both up +41%. Copper is up ~25%. However, not all commodities are popular. Gold, and especially silver, are having a tough year...even with the biggest threat of inflation in 30 years? Huh? Damn you, Biiiiiiiiiitcoin!? Equities are right behind oil and copper; particularly bank stocks that are likely to benefit from rising rates, with growing net interest margin.