APRIL 23, 2018
The world is in debt. The April 2018 International Monetary Fund (IMF) Fiscal Monitor reported global debt has reached a historically high level. In 2016, debt peaked at 225 percent of global gross domestic product (GDP) (the value of all goods and services produced across the world). Public debt is a significant component of global debt. The IMF wrote:
“For advanced economies, debt-to-GDP ratios have plateaued since 2012 above 105 percent of GDP – levels not seen since World War II – and are expected to fall only marginally over the medium term…In emerging market and middle-income economies, debt-to-GDP ratios in 2017 reached almost 50 percent – a level seen only during the 1980s’ debt crisis – and are expected to continue on an upward trend.”
There are numerous reasons high levels of government debt (the amount a government owes) and significant deficits (the difference between how much a government takes in from taxes and other sources and how much it spends) are a cause for concern:
- Higher interest payments. Governments typically finance debt by issuing government bonds. When bonds mature, the government issues new debt. If interest rates have risen, the cost of that debt increases. As a result, high debt levels can make tax hikes and spending cuts a necessity, explained the Committee for a Responsible Federal Budget.
- Lower national savings and income. You may have heard the phrase, “Robbing Peter to pay Paul,” which means taking money from one source to pay another. When a country runs a deficit, a similar thing happens. In The Long-Run Effects of Federal Budget Deficits on National Saving and Private Domestic Investment, the Congressional Budget Office explained, “…a dollar’s increase in the federal deficit results in…a 33 cent decline in domestic investment.”
- The tax lag. In his book, Do Deficits Matter?, Daniel Shaviro suggests sustained deficit spending creates a ‘tax lag’ by shifting responsibility for current spending onto future generations.
The IMF Fiscal Monitor wrote, “countries need to build fiscal buffers now by reducing government deficits and putting debt on a steady downward path.”
Last week, the interest rate on 10-year U.S. Treasuries rose above 2.9 percent, which raised concerns about inflation. Markets moved higher early in the week and declined later in the week. The major U.S. stock indices finished the week higher.
Key points for the week
- Stocks finished the week higher as gains in the energy, industrial, and financial sectors overcame weakness in tobacco and technology stocks.
- Chinese GDP grew 6.8 percent in the first quarter of 2018 but concerns for future growth are deepening.
- Energy stocks are rallying and have room to run.
Oil prices have resumed their upward climb in recent months, following a pause from the sharp run that began after a low point in June 2017 (see chart below). Many investors attribute the increase to heightened geopolitical tensions as oil prices often rise with the risk of conflict. We agree geopolitical risks are a contributing factor, but there are other factors pushing oil higher:
- OPEC and Russia have shown improved discipline in keeping production levels low.
- Inventories are declining faster than expected.
- A top oil-producing region in the United States, the Permian Basin, has a shortage of workers and insufficient pipeline capacity.
Energy stocks were the top performing sector last week. Our general outlook for the sector is positive as energy stocks haven’t risen nearly as rapidly as energy prices. Even with the good week, energy stocks are down 4.2 percent over the last 12 months, trailing the S&P 500 by more than 15 percent.
What are we reading?
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.
Tax Freedom Day was three days earlier in 2018 than it was in 2017, in large part due to the recent federal tax law, the Tax Cuts and Jobs Act, which significantly lowered federal income and corporate income taxes. In 2018, Americans will pay approximately $3.4 trillion in federal taxes and $1.8 trillion in state and local taxes, for a total bill of $5.2 trillion, or 30% of the nation’s income. Americans will collectively spend more on taxes in 2018 than they will on food, clothing, and housing combined.
Tax Freedom Day is a significant date for taxpayers and lawmakers because it represents how long Americans as a whole have to work in order to pay the nation’s tax burden. Check out this link Tax Freedom
Millennials Less Financially Secure Than Their Parents Were at the Same Age. This study measured differences in the financial wellness of today’s millennials compared to the youngest baby boomers when they were age 25 in 1989. The key findings show that millennial net worth is approximately 50% as much as baby boomers when they were young adults. A large increase in student loan debt is a contributing cause to this fact.
Don Byers, a 61-year-old grandfather, is now a freshman golfer
Weekly Focus – Think About It
“Then I say the earth belongs to each of these generations during its course, fully, and in their own right. The 2d. generation receives it clear of the debts and encumbrances of the 1st., the 3d. of the 2d. and so on. For if the 1st. could charge it with a debt, then the earth would belong to the dead and not the living generation. Then no generation can contract debts greater than may be paid during the course of its own existence.”
~Thomas Jefferson, Third President of the United States and principal author of the Declaration of Independence
“Believe that there's light at the end of the tunnel. Believe that you might be that light for someone else.”
~ Kobi Yamada, Author
"You control your life by controlling your time."
~ Conrad Hilton, Hotel Executive
Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and is subject to change without notice.
Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. Diversification and asset allocation do not ensure a profit or guarantee against loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as "The Dow" is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Please note, direct investment in
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