Daily Commentary

MarketMinder’s View: According to the nonpartisan Congressional Budget Office’s (CBO’s) latest long-term budget outlook, public debt as a percentage of GDP is projected to rise from 100% this year to 156% in 2055—and if that outlook is accurate, it would be 50 percentage points higher than the record set in 1946. The article also mentions spending for federal programs like Social Security and Medicare will keep on climbing as America’s population gets older, implying this will contribute to mounting debt, and the CBO worries future GDP growth will decelerate due largely to the labor force’s projected slower growth and productivity while reduced investor demand stresses Treasury markets. That is a bleak-sounding future, but a couple points to keep in mind. First, comparing debt to GDP is a popular metric since the latter serves as a stand-in for a country’s income. Problem is, debt builds up over time while GDP is an annual flow of economic activity—so it isn’t an apples-to-apples comparison. Moreover, a country’s economic growth and inflation can reduce a country’s debt burden, even if the total amount of debt continues rising—the UK has a long history of outgrowing its debt. Second, worries about worsening demographics hindering the economy of tomorrow presumes human capital alone is responsible for growth. Yet societies’ fates aren’t set in stone (e.g., technological advances can make fewer folks more productive, birth rates can rebound), so we don’t think an older population is inevitable, let alone will necessarily hamstring the US economy in 2055. Which brings us to our last and most important point: This outlook relies on a lot of straight-line math to arrive at its conclusions. But that isn’t how the real world works. Think of some of the developments over the past five years that the CBO couldn’t have predicted in 2015 (e.g., a pandemic shutting down the global economy, advances in artificial intelligence, etc.). We aren’t criticizing the CBO or any other outfit taking long-term views, but outlooks are only as good as their inputs—and nobody has a crystal ball about the future. Anything further than the next 30 months or so has simply too many unknowns to predict accurately today. For more on this topic, see our February 2024 commentary, “Digging Into the CBO’s Debt Forecasts.”

MarketMinder’s View: This piece centers on politics, so please note MarketMinder is nonpartisan. We assess political developments for their potential economic and market effects only. Just a few weeks after rallying the votes he needed to amend Germany’s constitution and pass his €500 billion infrastructure fund proposal, Chancellor-in-waiting Friedrich Merz is running into some unsurprising roadblocks. “But even after painstaking coalition talks conclude in coming weeks, Merz’s achievement of loosening budget rules to unleash a debt-fueled spending spree will face a gauntlet of extended scrutiny by lawmakers, followed by bureaucratic decision-making on its implementation, all slowed down by limited capacity.” As described here, “The money itself could be slow to arrive: the year may be drawing to a close by the time the infrastructure fund becomes law, and in common with other advanced economies, large German projects face drawn-out procurement, permitting and planning processes that often consume far more time than actual construction.” For investors, this drawn-out process highlights how public investment plans aren’t always what they seem. Perhaps annoying for constituents, but not a massive negative for stocks. As we covered last month, Germany’s economic future doesn’t rely on massive government spending right now. But investors can learn from pundits’ excitement for Merz’s spending packages. Implementing legislation takes time and can hit delays for a number of reasons (e.g., bureaucracy and staff shortages). Keep these mundane realities in mind next time speculative buzz around public investment hogs headlines.

MarketMinder’s View: We don’t typically hit on stories focused on short-term market moves, but we think bitcoin’s recent dip is worth commenting on for a broader theme: Beware political hype. “Ever since he won a second term, Mr. Trump has largely made good on his promises to help the crypto industry. He has appointed regulators who support crypto and signed an executive order directing the creation of a government stockpile of Bitcoin.” Yet, as the title notes, bitcoin has slid alongside global stocks after last week’s tariff announcement. Mind you, bitcoin’s price swings are nearly impossible to pin down, given digital currencies move most on short-term sentiment swings. But we still see a takeaway for investors here: Acting on politicians’ promises is rarely fruitful for investors. Doing so amounts to buying into hype and overstating pols’ influence over capital markets, which isn’t as great or obvious as many think.