This time we do what we can to separate the news from the noise to see the differences between what we hear and what is really going on. First we will review the news, followed by what the information really means. After all, an informed investor is a smarter investor.
Did Anyone Notice the Government Closed?... Of course we all know about the U.S. government shutdown. It is causing headaches for everyone who deals with the government. But there are wide swaths of the population that are not immediately affected.
What it means - While most people do not directly deal with the U.S. government on a daily basis, there are thousands of businesses and individuals that do. The shutdown has closed national parks, monuments, inspection offices, defense contractors and most of the IRS, just to name a few. For our business, the shutdown means a lack of government statistics on the state of the economy. That is why this week, when the employment report was due, it was rather quiet.
Debt Ceiling Less Than Two Weeks Away... The U.S. officially reached its debt capacity at the end of the summer, but has been using other pockets of money to meet its obligations. The extent of these funds will be exhausted on or around October 17. With the shutdown continuing, people are now nervous that the debt ceiling could actually be reached.
What it means - On the day that the U.S. government fails to pay its bills, the sun will still rise in the east and the light switch will still work. Gasoline will be available and restaurants will be open. In short, little will change with our daily lives. It is most likely that little will change with our financial lives either, over the long run at least. That's because our default would be by choice, the result of the political wrangling that the world has watched. It's not a surprise, and it is not because we can't get a loan. People want to give us money. However, in the short term it could be the start of a major selloff in equities - at least 5% or so - as well as a drop in the U.S. dollar and a pop in interest rates. This could be a good time to step into equities and ride the last rally before we top out, probably during the first quarter of next year.
Student Loan Defaults Marching Higher... The latest report on student loans shows the rate of default in the first two years of a loan has risen from 9.1% to 10%, while the rate of default in the first three years has increased from 13.4% to 14.7%.
What it means - Historically, the three-year default rate is close to the expected default rates for the overall program. From this we could expect almost 15% of student loans to default, which would be over $150 billion. Unfortunately, that is probably a very low estimate. With a jobs market that simply won't push higher anytime soon, wages will remain under pressure. This will keep student-loan borrowers on the ropes for many years after graduation and will also stymie normal economic growth as these consumers struggle to make ends meet, much less grow their spending.
Manufacturing Shows Gains... The Chicago Purchasing Manager's Index (PMI), the Dallas Fed Survey, the national PMI and the Institute for Supply Management (ISM) Manufacturing survey all showed gains in September.
What it means - This is interesting when compared to the disappointing durable goods report from last week. Without a jobs report on Friday to back up the gains - meaning that they led to more employment and, therefore, added meaningfully to the economy - there is little we can do but wait for confirmation.
Consumer Spending, Factory Orders, Jobs Report All Delayed by Shutdown, So No Report on These Statistics.
Chinese PMI Barely Budged, Inching to 50.2 From 50.1... The Chinese PMI is sitting just above the dividing line between growth and contraction.
What it means - It looks like the latest round of Chinese stimulus had little effect. The government has not been able to kick-start the economy, but it has managed to fund a property bubble that is still expanding. Credit only seems to be funding speculation and is not being used to build productive capacity. You have seen this movie before. Whether it is governments, companies, or consumers, you can have major unforeseen difficulties when we attempt to get richer by taking on more debt than we can manage. When the leveraged asset bubble blows... watch out!
A Note on the Shutdown - Many government offices are closed, including those that calculate and release government statistics. This has left many analysts fumbling around, at a loss for what they should do next. We have a suggestion. People interested in tracking economic data need to get back to reality. Look at the situation of everyday citizens. What do they make? How do they spend their money? How are they prepared for the future? What lies ahead? Too often we get lulled into a sense of complacency because a certain number or series, like the gross domestic product (GDP) or the consumer price index (CPI), shows little movement. Our economy - as well as those in Europe and that of Japan - has serious structural issues that are hidden inside a GDP of 2.5% and a CPI of 1.5%. If we start focusing on what is happening to everyday consumers, perhaps we will work a little harder at finding solutions to our economic issues... preferably before they blow up.
A Larger Concern - It is my opinion that the bigger threat to the economy and the markets
may result from the debt ceiling debate that will begin in the next two
weeks or so. If this is anything like 2011, it is conceivable that we
could experience greater negative volatility and stress in the marketplace.
One of the reasons the Fed did not stop tapering may be due to economic
uncertainty. Risks to the economy and the markets may increase if the
current government shutdown continues into the debt ceiling debate.
This Week - The week of October 7 will hopefully bring an end to the silly shutdown and with it a number of economic reports that are now late. We're also waiting on the minutes from the last Fed meeting, as well as a report on the producer price index. This week will be all about the shutdown and the debt ceiling.
Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
This information contained in this newsletter is general in nature and should not be construed as comprehensive financial, tax, or legal advice and the opinions expressed are not endorsed by NPC. As with any financial or legal matter, consult your qualified securities, tax, or legal representative before taking action
While there are over 3,000 local financial advisers with many different opinions, it’s possible that not all firms in the Conejo Valley pay for independent research. This independent research is one of the features that helps investors see the larger picture and make appropriate, if not more informed decisions. The independent research has been used with investors in the workshops the firm conducts since1999 when John Grace became Master Certified and a Charter Member with the H S Dent Advisor’s Network.
“Master Certified” references those who pay a fee to learn about various economic trends and have demonstrated by passing tests the ability to effectively answer.
The information presented here has been provided by HS Dent. HS Dent is an economic research company that uses various techniques to study the potential impact of various changes in demographic trends on our economy. No one person or strategy can accurately predict market movements.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Investor's Advantage Corp, HS Dent, and NPC are separate and unrelated companies.
Investments are inherently risky and will fluctuate with changes in market conditions. Consideration should be given to the possible loss of a part or all of principal invested.