Craziness abounds… astonishing government spending and debt… how our analysts will help you navigate “What the Bleep is Going On?” this week
We begin today’s Digest by jumping straight into a piece written by our CEO, Brian Hunt.
I (Jeff) will circle back later. But for now, here’s Brian…
***“What the bleep is going on?”
If you’ve followed the financial markets – even casually – over the past year, you’ve seen a parade of weird events. Events that don’t make much sense when analyzed inside most financial models.
Events that make you wonder What. The. Bleep is going on.
And to be clear, it’s not just the Average Joe scratching his head in disbelief. It’s also Wall Street. It’s also many of the world’s richest, most powerful people. Billionaires. CEOs. Venture Capitalists. Hedge fund managers.
Today, people who can pay whatever price it takes to know what is going on don’t know what the bleep is going on… in a way that is much different from confusing and strange times of the past.
To put it simple, we are living in a World That Is Nuts.
Let’s look at a short list of the craziness we’ve been seeing…
**In just the past year, we’ve seen a cryptocurrency that was started as a joke and serves no real economic purpose (Dogecoin) soar to a $66 billion market valuation. More valuable than Twitter or Ford Motor.
**We’ve also lived through the worst recession since the Great Depression. Despite the economy getting hit with a Covid-19 shaped meteor from outer space, the stock market soared to all-time highs.
The popular FANG stocks continue growing to unheard of market valuations larger than the GDP of many countries.
**Bitcoin, which has supplanted gold as the preferred asset people buy when they want to insure themselves against inflation and economic crisis, soared 450% in price from Fall 2020 to Spring 2021.
**Then you have the prices of basic materials like corn and lumber soaring in a way that makes tech stocks look boring by comparison.
The price of lumber has soared nearly 3-fold since November. The price of corn – a critical ingredient in many of the things Americans eat – has doubled since August.
**Then you have the white-hot real estate market. In January 2021, U.S. home prices were up 11.2% year over year. That’s the largest annual gain in nearly 15 years. Many U.S. real estate markets are up 25%+ year over year and are being commonly described as “insane.”
One day, a house goes up for sale, the next day it has a dozen offers over asking. It’s a scenario many home buyers have lived through during the pandemic.
**And for good measure, we now have “NFTs,” or Non-Fungible Tokens. These are essentially assets like art, music, and collectibles that have been securitized and made freely tradeable.
One NFT by the artist “Beeple” sold for more than $60 million this year. It was purchased by someone who made a fortune in cryptocurrencies.
As a CEO of a financial publishing company, I have heard some form of the question What the heck is going on? asked from a place of intense worry, confusion, and interest on a level I have never seen before. That’s the bad news.
The good news is that I think I have the answer. And I think it can help you make a lot of money while at the same time keeping you safe from the dangers that come with living in a World That Is Nuts.
The good news about the good news is that understanding what the bleep is going on is pretty simple: The U.S. government and the handful of other major world governments are printing, borrowing, and spending money on a colossal level… on a level we’ve never seen before.
I believe this spending spree will push the value of select, high-value stocks higher and higher.
***Jeff here. Let me put some data behind Brian’s point
Nextgov reports that in 2020, the federal government spent a record $6.5 trillion. That easily topped its previous spending record of $4.5 trillion in 2019.
From Nextgov (written last fall after the Fed’s fiscal year ended):
According to the nonpartisan Committee for a Responsible Federal Budget, prolonged deficit spending grew the national debt to $21 trillion, or 102% of gross domestic product.
“The only other time debt has exceeded the size of the economy was at the end of World War II—and we ran years of mostly balanced budgets afterwards to bring it back down. We should be borrowing now, but once the economy recovers, our debt cannot continue to grow faster than the economy forever,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
“It’s disappointing to see both candidates for President proposing trillions of dollars in additional debt instead of plans to save Social Security and Medicare. The deeper we dig this hole, the harder it will be to claw our way out.”
I can only imagine how disappointed Maya MacGuineas must feel right now, after President Biden’s three blockbuster domestic spending proposals tally about $6 trillion.
But if you think our government’s spending is out of control now, just wait.
The U.S. national debt is rising at a pace never seen in the history of America. With a current debt exceeding $28 trillion – an increase of nearly $5 trillion in 14 short months, Washington is now debating an infrastructure bill with a price tag close to $2 trillion.
Even without this additional spending, the national debt will approach $89 trillion by 2029 according to USDebtClock.org. This would put the country’s debt-to-GDP ratio at 277%…
Yes, America is losing, or perhaps already has lost, control of its public spending.
Do you want to see what “lost control” looks like?
Below is a chart of our federal surplus or deficit since 1930. Look at the many years of balanced budgets up until the late 1970s (evidenced by how the surplus/deficit line hugs the “0” line for decades). Then look at what’s happened since 2015 (circled in red). It speaks for itself.
Back to Forbes:
In more recent times, Washington’s propensity to overspend has been unparalleled.
When the financial crisis hit in late 2007, Congress passed a series of spending bills, known as quantitative easing, to help the country emerge from the Great Recession. Back then, expenditures were about 67% greater than receipts.
The Covid-19 pandemic has ushered in a new wave of spending with expenditures surpassing receipts by nearly 92%. The following chart contains the data.
Simply put, we are leveraging our future to stimulate today’s economy.
According to a 2011 research paper from the Bank of International Settlements – a bank and research hub owned by 63 central banks from around the world, when government debt-to-GDP exceeds 85%, future economic growth is reduced.
With a current debt-to-GDP ratio of 127%, which is expected to rise to 277% by 2029, future economic growth will not be as robust as it has been in the past.
I should add that none of this includes what we’re on the hook for regarding our government’s unfunded liabilities.
To make sure we’re all on the same page, unfunded liabilities are all of the “stuff” the U.S. government has promised to pay out to its citizens in the future. You have Social Security, Medicaid, pensions, and various social safety-net programs, among other things.
These expenses are very real… they’re enormous… yet they’re not reflected in that nearly-$28 trillion+ debt figure we’ve been discussing. That’s because these unfunded liabilities are future expenses. Our government is all-too-happy not to include them in our official debt calculations.
So, how much are we on the hook for with these unfunded liabilities?
Billionaire, Jeffrey Gundlack, also known as “The Bond King,” puts the number at $163 trillion. That’s more than 5X our already-absurd, outrageous-expensive national debt.
***It’s safe to say that the U.S. government is spending and handing out money at a “crazy” level…which is causing crazy things to happen
Brian pointed toward just a handful of those crazy things earlier.
As a result, many investors are feeling confused.
So, this week, we’re introducing a running segment in the Digest that we call “What the Bleep is Going On?”
We’ll be turning to our expert analysts to get their thoughts on what’s behind today’s craziness, what’s coming, and most importantly, what to do about it.
***For today, let’s look at just the latest piece of craziness – the jobs report from last Friday that shocked virtually everyone due to how low the number came in
For this, we’ll turn to Luke Lango, our hypergrowth investment expert, and the editor behind Hypergrowth Investing.
Economists thought the U.S. economy was going to add a million jobs in the month of April, and that the unemployment rate would drop further to 5.8%. At that pace, we would be back to “normal” and “healthy” in no time.
But neither happened.
Instead, the economy added just 266,000 jobs in April, and the unemployment rate moved higher to 6.1%.
To put those numbers in perspective, before Covid-19 hit and when we were working with a labor force much bigger than today’s labor force, the U.S. economy was regularly adding more than 200,000 jobs per month throughout 2018 and 2019.
In other words, that 266,000 number is a bad print – and if that becomes the new normal, the U.S. economy won’t reach pre-Covid levels of employment until November of 2023… a full two-and-a-half years away.
I suspect the April print will be the new normal, because you didn’t just see a weak April jobs report. You saw the ISM Manufacturing index for April come in well below expectations and decelerate sharply from the March reading. You saw the ISM Non-Manufacturing index follow a similar decelerating trend in April.
Under the hood, I think a lot of the pent-up consumer demand has been unleashed already, and that some permanent and lasting damage has been done to the economy.
Luke provides some personal examples of seeing lots of pent-up demand being unleashed, then turns to his takeaway:
So, net net, I’m staunchly in the camp that while the U.S. economy is improving very quickly, the pace of this improvement will moderate significantly as we get deeper into 2021, and that we are still years away from the economy being as healthy as it was before the pandemic.
OK… but why am I telling you this? To scare you out of the market?
No. Far from it. Rather, if what I’m saying is true, that’s actually bullish for the stock market – and incredibly bullish for hypergrowth stocks.
Notice how the entire market rallied in a big way on Friday after the bad jobs report?
Not a coincidence. A “marathon” economic recovery is better for the stock market than a “sprint” economic recovery for a few reasons.
First, it reduces the risk of the economy overheating and inflation running wild, which would of course be a headwind for stocks.
Second, it should keep Treasury yields in check, which will provide support for extended stock market valuations.
Third, it will keep the pressure off the Fed and, indeed, keep the Fed on the sidelines, meaning easy money policies will remain intact for a lot longer – another big tailwind for stocks.
So, yes, if indeed our economic recovery is a marathon and not a sprint, that’s great news for the stock market. As the old saying goes, slow and steady wins the race.
We’re running long, so let’s wrap up today’s Digest. You’ll hear more from Luke later this week.
For now, the craziness is here…but so are money-making opportunities.
What financial absurdities are you seeing? What opportunities are you taking advantage of? Email us your thoughts at Digest@InvestorPlace.com.
Have a good evening,