Wondering why the market has are becoming more volatile as of late? Simply put, the U. S government has been borrowing too much money for the bond market to absorb over the last year. That’s despite very strong corporate profitability, a good economy and the tax revenues that come along with it.
Gone are the promises of fiscal restraint replaced with a proposed $4.4 Trillion U.S. budget, of which more than $1 Trillion will need to be either printed or financed via the global, bond market next year. The proposed budget amounts to an additional $7 Trillion in national debt over the next decade.
U.S Treasury debt financing was up significantly in the past year. Even before the proposed budget, the U.S. was already looking for too much money for debt markets to absorb in the short run. As a result, the increased U.S. bond sales are pushing up interest rates on long bonds. Rising interest rates also represent a challenge to consumers at large. Over the last year, this has brought down the value of the U.S. dollar and now, that printing of new money is starting to drive inflation.
Rising rates do not necessarily mean the end to the 9-year bull market (more often recessions do), but they do cause uncertainty – which is something markets do not like. This is what we’ve seen of late.
The government’s ongoing need for cash is not going away either, (rather, it’s likely to increase) – so it makes sense we are likely to see bigger day to day market swings into the future as they continue to borrow even more heavily.
We expect this volatility to be increasingly common in years to come. As the American baby boom heads for retirement, unfunded liabilities (those not included in the $20 Trillion the U.S. already owes) will come into play for everything from infrastructure to pensions to Medicare. They are estimated to total an additional $60 – $70 Trillion which will put significant additional stress on markets in coming years.
Along with the proposed budget, there also comes substantial cuts to social and health programs. It would appear that the future is not going to be a great time to be without money.
All of this said, irrespective of weakening U.S. Government financials, it is most important to remember that the U.S. largely runs the world financial markets. And not only do they control the infrastructure, institutions, and conventions, everyone around the world actually uses U.S. currency as if it were their own.
With that control, they have the option of dictating the terms to other players, which tends to tilt the board in their favor. As a result, irrespective of valuations, things continue much as they were before, even in the light of imbalance. Until that dual control infrastructure/ecosystem and global standard of currency dissipates, we can see no reason for a significant change in U.S. dominating industry and thus ongoing long term continued corporate profitability.
Let’s close with this…
Volatility, though unsettling to experience, can be an asset to your professional managers. They get to buy bargains during large-scale pullbacks. We feel they are relatively well prepared to take advantage of downturns.
While we are not in the business of predicting markets, we also feel we are well prepared, as we’ve been preparing for a downturn for some time now.
Also, important is to keep media news in perspective. The TSX on August 01/2017 closed at 15,202 points. At the time of this writing today’s TSX values are at 15,308 points.
The Dow average closed on August 01/2017 at 21,891 and at today’s writing is at 24,618 points. Both of these results point to a market that rose too quickly over the last 6 months and should not surprise anyone when a market correction actually happens.
With any change, there is both concern and opportunity. That is precisely why we hire professional management. To attempt to make the best of things when they do occur. To ideally limit downside risk while using cash positions to buy bargains as they appear.
As always, if you get concerned, please contact us.