Week Ending January 22, 2017
This past Friday represented the official baton hand-off from the previous Administration to the now current Administration. Whether your political affiliation falls under the Democrat, Independent, Republican or political atheist banner, the common thread weaved through all is citizenship. As citizens we are collectively responsible for our accumulated debt known as our National Debt, as well as Unfunded Liabilities which measure $100 Trillion-plus and dwarf the often referenced National Debt. Servicing these will impact all of us in various ways.
The operative phrase is “accumulated debt” in that it is very important (and seemingly rarely focused on) that what has taken place has accumulated through time, and with this, one Administration takes on the circumstances of previous Administrations – not only the immediately preceding Administration. As much as we would like to feel that day one of any new Administration represents a blank slate, it simply does not, particularly when viewed through the structural backdrop of our national finances.
For my part, I customarily look at various measures of our nation’s financial backdrop with the onset of a new Administration. Below is a brief view, via our National Debt.
As the table above offers, in the previous eight years our total National Debt has escalated from $10.6 Trillion up to $19.9 Trillion. This represents a near doubling in the previous eight years. For context, and speaking to accumulation, the Administration before our most recent also nearly doubled the debt level from the $5 Trillion-plus level (not shown) to the $10 Trillion-plus level we see depicted in the above table.
All told, in the previous 16 years, encompassing two different Administrations, we have gone from a $5 Trillion debt level to the current $20 Trillion level. Said differently, it took us 211 years to accumulate $5 Trillion-plus in the National Debt and a mere 16 years to increase that by 4x to $20 Trillion. This is a staggering increase when viewed through the lens of our history since inception.
The above graph places the National Debt into context relative to our economic activity known as GDP. Importantly, the above graph does not include the aforementioned Unfunded Liabilities that dwarf the National Debt. For a broader perspective, the above chart dates back to the mid-1960’s which puts into perspective how fast our debt level has increased compared to our GDP growth since 2000.
More specifically, speaking to the hand-off point of the previous Administration to the now current Administration, we see the red arrow marking the beginning point up to our current range. Our National Debt has grown to be larger than our annual GDP as our debt as a percentage of GDP now registers 105% as the graph depicts.
For a much larger context relative to distant history, since 1900 – yes 1900 – the only time our debt as a percent of GDP has been this high was near the very end of WWII, representing the pinnacle of WWII financing. At that time it peaked just north of 120% of GDP.
The Takeaway:
Whether you love, hate, or are indifferent to the now new Administration, the above starting point, brought on by various Administrations, represents a structural financial backdrop that is quite challenged as represented through the last few decades, and worse, dating back to 1900.
If you are a frequent reader of these Weekly View’s you may recall the repeated psychological invitation we have shared, post-election, to keep a clear head removed from any biases you may hold relative to the election results – be it positive or negative. As market participants we cannot afford to hunker down in a particular preset view in light of the multitude of crosscurrents markets are facing.
There is a litany of items we can lay out here, across markets that offer both positive and negative near-future outlooks. One point is certain per the above data: We are in serious need of consistently strong economic growth to help get the accumulated debt to be at more manageable levels. We have witnessed a long run whereby debt has grown faster than GDP. At a minimum, we need to see this reversed to a more constructive experience whereby our economic growth outpaces the growth of debt. This is one more measure we will be monitoring and sharing as the current Administration’s term unfolds to see if we are constructively reversing these concerning trends.
I wish you well…
Sincerely,
Ken Reinhart
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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