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What is the U.S. Debt Ceiling?

Q4 2021 Market Commentary…

What is the U.S. debt ceiling? It’s simply a dollar cap limit that the US Government places on its own authority to raise money by issuing government bonds to continue to meet its obligations like social security payments, tax refunds, interest payments on existing debt, government employee salaries, military salaries, just to name a few. Since 1917, Congress has raised the debt limit 78 times (See Citation 1).

The U.S. government hit the debt limit of $28.4 Trillion (yes, with a T) in July 2 (See Citation 2). In fact, the debt load is a few billion over that as I write this newsletter, and the U.S. Treasury is pushing to get it raised by October 18. Since the U.S. Treasury debt is over the limit, something needs to get done, lest they are forced to default on the payments. Of course, members of congress rarely let that happen. They typical play hard ball with each other and then usually get it done in the 11th hour.

Raising the debt ceiling is not a healthy thing. It’s a necessary evil. With each dollar the government borrows, it steals purchasing power from future generations, and it makes all of us poorer for it. Unfortunately, the alternative is that the government defaults on their obligations. We each know hundreds of people who count on government payments, and no one wants those recipients to be adversely affected by a problem they didn’t create. Beyond the debt, we have other concerns…

• Will the $3.5 Trillion infrastructure bill get passed in Congress?
• Will higher inflation be transitory or here for a longer period?
• How much will the supply chain shock delay or reduce future earnings of companies?
• How will future employment numbers be affected by the corporate vaccine mandates?

As investment advisors, we grapple with questions like these constantly. Our only practicable response is to revert to economic data as it relates to outcomes of these uncertainties. As you know, we have adopted the silo method, by which we view the market through the lens of growth (GDP) and pricing (inflation). We spent most of Q3 in Silo 3 (decelerating GDP + accelerating inflation), and the stock market started to show signs of exhaustion in September as the S&P 500 Index 4.8% (See Citation 3) of its value.

If forthcoming GDP re-accelerates, it might indicate that the recent market swoon was episodic and not a reversal of bullish trend. The combination of accelerating GDP and accelerating inflation would put us back in a reflation condition (Silo 2), and that could be positive for stock prices. However, if GDP continues to decelerate, we could be in for a bumpy ride in Q4. When we get higher prices on goods and services amidst a period of lower economic output, future corporate earnings suffer. If economic recovery becomes less certain, investors get uneasy and market volatility appears. Let’s hope the post-COVID recovery data in October surprises us to the upside.

Citation 1 – https://en.wikipedia.org/wiki/History_of_United_States_debt_ceiling
Citation 2 – CBO.gov/publication/57371
Citation 3 – Yahoo Finance: S&P 500 Index Historical Return data

Future BrightWhat is the U.S. Debt Ceiling?
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Has inflation fully kicked-in yet?

2021 Q3 Commentary…

In last quarter’s commentary, we addressed inflation as an increasing headwind on the stock market. Just how much inflation is in the offing and whether it is transitory (i.e. – temporary and manageable) has been the hot public debate in financial circles during the second quarter. Anecdotally, I’ve heard from many of you about the rising cost of 2 x 4’s, tires, used cars, gasoline, and even Burger King chicken sandwiches. I paid $4.09 for an order of large fries at McDonald’s in Moorhead this week! Perhaps the only real takeaway there for me is that by making better diet choices, I could help stave off inflation.

Has inflation fully kicked-in yet? That’s what investors want to know. The uncertainty makes for a Jekyll and Hyde market. Admittedly, there have been days this quarter in which the markets have made our reflationary investment thesis (aka – Silo 2) look foolish and other days it has made us look genius, but we must stick to our guns on the data we have in hand. The alternative is to become like the dog who chases its tail, and that doesn’t end well when investing.

Two byproducts of an economic recovery are higher prices and higher wages. Since the economy has not fully recovered to pre-COVID levels, it’s very possible that there is more inflationary pressure coming, despite the Fed downplaying the concern. Economic growth, as measured by GDP, must gather enough strength in an inflationary cycle for the economy to absorb these higher costs. Any slowdown in GDP into an inflationary cycle puts us at risk for stagflation, and that can be a stiff headwind for asset values.

As of this print, the rate of change on both GDP and inflation data show that both are still accelerating. We read that as “two thumbs up” in our silo investing model, and we continue to stick with reflationary investment positions. The Federal Reserve has the unenviable job of trying to thread the needle on the timing of future rate hikes. If they hike rates too soon, they risk prematurely slowing the recovery. If they hike too late, they risk inflation running hotter than the economy can handle. The recent stock market performance reflects this quandary as there is not much conviction in the upward trend, and the market’s incremental gains have come on the backs of too few companies to call it another leg up in the rally.

Volume also matters. It’s been a thinly traded market in the second quarter, which further speaks to the lack of conviction. We think the coming inflation and GDP data will provide more certainty of a determinable trend in the 3rd quarter, and we will position assets accordingly. Our hope is that growth in GDP can match or exceed the strength of the inflationary forces so that we can continue to play offense in this market.

Future BrightHas inflation fully kicked-in yet?
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What happens when interest rates rise?

2021 Q2 Commentary…
Can stocks and interest rates go up at the same time? Yes, they can, and they often do. Right now, we are in a period of recovery from economic shutdowns across the globe. As companies are forced to raise prices in 2021 and meet a return in consumer demand, we are watching inflation like a hawk. Specifically, we pay very close attention to the 10-year treasury note yield as our sentiment barometer.

First, a quick education on why the 10-year treasury yield matters…
▪ Treasury securities are loans to the federal government. Maturities range from weeks to as many as 30 years.
▪ Because they are backed by the U.S. government, Treasury securities are seen as a safer investment relative to stocks.
▪ Bond prices and yields move in opposite directions—falling prices boost yields, while rising prices lower yields.
▪ The 10-year yield is used as a proxy for mortgage rates. It’s also seen as a sign of investor sentiment about the economy.

How high can the 10-year treasury yield go before we do see it adversely affect the performance of the stock market? Some economists predict it’s 3%. Others say it’s 2.5%. The truth is that their predictions don’t really matter. What matters to us is the rate of change in inflation data that typically drives the change in interest rates. If the rate of change of inflation is increasing quarter over quarter, it signals a robust recovery is afoot, assuming job growth and GDP are accelerating, as well.

When inflation becomes too large of a problem to ignore, we typically see it unfold. Take the current housing market, for example. There are hot pockets in this country where new and existing home prices have been climbing double-digits for three years running. The FOMO on low interest rates coupled with tight supply and rapidly rising prices on homebuilding materials are creating a perfect storm for a severe housing price correction, or worse yet, a crash. Translate that to the rapid rise in prices of technology stocks or “Covid-Friendly” stocks, and there is similar risk. We don’t see it in the data right now, but the risk is always present because the data can change quickly.

All signs are pointing to a strong economy in Q2. As quarterly earnings start getting released in mid-April, we’ll likely see the companies negatively affected by COVID at this time last year crush their prior years’ results. Will that recovery strength be broad enough and strong enough to fight the inflationary price wave coming? Again, we don’t know until the data shows us. What we do have to go on is the data in hand (GDP accelerating, Inflation accelerating), and we’ll continue to maintain positions we deem as favorable to own under those conditions, knowing it could turn on a dime at any time.

Future BrightWhat happens when interest rates rise?
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Using Data to Position Assets Favorably!

Q1 2021 Commentary…
2020 was a year full of alarming statistics. One you maybe didn’t hear was that over 10 million new brokerage accounts were opened by first-time investors in just the United States alone! This influx was the result of three things: stimulus checks, a pandemic-induced market selloff, and the elimination of trading commissions at brokerage firms such as Schwab, TD Ameritrade, and Robinhood.

2020 created a perfect storm to attract more individuals to invest, which is a great thing for market efficiency and liquidity. The dangerous part of this perfect storm is that many younger, new investors have not yet experienced a significant market crash, as most of this new money came into the stock market during its recovery. Significant gains were created by and for investors who were willing to take on the risk of buying assets some maybe didn’t even fully understand. New money was piling into SPACs, Bitcoin, LIDAR stocks, to name a few. (If these terms don’t ring a bell, it’s okay. We got you covered.)

In client accounts that could afford to take the risk, we benefited from the irrational exuberance of many of these first-time investors. In fact, we rode some of the waves they created. However, we know the tide can go out just as fast as it comes in, and as asset managers, we have to have a game plan in place for when markets aren’t turning up all roses. Discipline is often what marks the difference between casual, DIY investors and those of us who do this for a living in times like these.

If 2020 taught us anything at Future Bright, it’s that we have to pay attention to the raw economic data more than ever before. We’re not talking COVID numbers. We’re talking economic numbers. Specifically – GDP and Inflation – which are the two most telling indicators of what lies ahead for financial markets.

Currently, we’re in a “GDP up, Inflation up” environment. Certain investments work better than others under these economic directional conditions, and it’s our job to find them for you. It’s also critical to recognize these economic directional conditions will periodically shift. That’s just how economies ebb and flow. They endure four cycles: Prosperity, Reflation, Stagflation, and Deflation. If we know the current economic directional condition and can also see when that condition is changing, we can use data to position assets favorably under any condition.

Ironically, asset management in 2021 will be much more challenging than it was in 2020. We expect to see greater market volatility this year. (Honestly, we thought volatility would come in Q4 of 2020, but it never did.) Nonetheless, it is also a very exciting time to be an investor. The public policy response driven by COVID has actually accelerated many new market opportunities in technology, energy, healthcare, e-commerce, and other industries. As always, there will be winners and losers in the markets, but there are some great opportunities for wealth creation ahead borne out of both volatility and emerging investment opportunities.

Future BrightUsing Data to Position Assets Favorably!
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Goodbye to “2020”

Phew! We soon will be able to put 2020 behind us. The financial markets have been just as abnormal as most other facets of our lives this year. All the relevant U.S. stock indices endured the fastest bear market declines in history…just 16 days! It was swift and severe, yet short-lived, as the markets repaired most of the damage in the form of a V-shape pattern despite most Wall Street “experts” predicting an L-shaped recovery.

Future BrightGoodbye to “2020”
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Recovery

Hello friends, Social distancing affords a person a lot of time to reflect on life, doesn’t it? This time spent at home with family has been a great blessing. Life’s pace has slowed down, and that’s the solace I didn’t know I needed. I hope you’ve found your own moments of solace amidst this abnormal reality, as well.

Ross AlmlieRecovery
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“Landlines” Have Gone Away for Us!

No more landlines for us! We have eliminated our landline phones at the Future Bright office. They were used too sparingly to justify paying for them anymore. As such, the (218) 359-2305 number no longer exists. Most of you have my cell number, but in case you do not, please write this number down or add it into your contacts: Ross Almlie Cell 701-306-7631
Feel free to contact me by text or phone call at this number. If I don’t answer when you call, please know that I will make best efforts to return your call or text as soon as I can.

Ross Almlie“Landlines” Have Gone Away for Us!
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Individual Stocks – Are they for you?

2020 Q1 COMMENTARY:
Contrary to what logic might suggest, the most difficult time to be an investor is when the financial markets are in the late stages of a multi-year upward trend. As we witness market levels hit record highs, the appetite for adding new money to investments can start to wane for fear that the most opportune time to buy has already passed us by. It’s an innate thought process. Since we were little, we’ve all been taught that too much of a good thing is not always a good thing, and it’s a legitimate lesson that I’m sure we’ve all learned multiple times in our lives.

Ross AlmlieIndividual Stocks – Are they for you?
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“Race to Zero” is over!

Just a few items to share with you as we dig into this 4th quarter…

The “Race to Zero” is over. Commissions at TD Ameritrade have always been very low relative to its competitors in the industry. I’m happy to report they have now been reduced to $0.00 on all TD Ameritrade stock and ETF trades effective immediately! This is beneficial to everyone, but it is particularly beneficial to those adding regular contributions incrementally to fund Roth IRAs, Traditional IRA’s, SIMPLE IRA’s and SEP IRA’s. The race to zero is over, and investors win!

We’ve added to our team! I’m pleased to notify you that we’ve added two more investment advisors – Matt Johnson and Randall Sidener – to our Future Bright advisory team. Both are longtime friends of mine. Matt joined the firm earlier this year and brings over fourteen years of industry advisory experience along with him. He’ll continue to operate out of Detroit Lakes. Randall will join be joining in mid-October. He is an industry veteran in the mutual fund wholesaling business, having spent the last thirteen years with Integrity Viking Funds out of Minot. Randall will be joining me at our office in Moorhead.

Ross Almlie“Race to Zero” is over!
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