Daily Commentary

MarketMinder’s View: In our view, too many investors take forecasts—particularly from the Fed—at face value. But a look at experts and policymakers’ record should give pause. “Larry Swedroe, head of financial and economic research at Buckingham Strategic Wealth, for decades has studied economic forecasts of everyone from stock-picking gurus to the Federal Reserve. He has this piece of advice: Don’t base your investment decisions on what the Fed says. Or anyone else, for that matter. Swedroe recently wrote an article where he looked at one simple metric: the Fed’s effort to project its interest rate increases for 2022. Swedroe noted that at the end of 2021, the Federal Reserve forecast that it would need to raise rates three times and that its policy target rate would end 2022 below 1%. What actually happened? The Federal Reserve raised the Fed funds rate seven times in 2022, ending the year with the target rate at 4.25%-4.50%.” While this is just one example from one analyst, history features plenty of mistaken prognostications from the Fed (and others). So we think the question the article asks is apropos: “If the Fed can’t get it right, what hope do we have?” Moreover, the Fed agrees! To wit: “The Fed’s own research staff studied the Fed’s economic forecasts from 1997 to 2008 and found that the Fed’s predictions for economic activity one year out were no better than average benchmark predictions. How does this happen? There are two problems: 1) Predictions from the Fed and everyone else are riddled with bias and noise that limit the quality of those predictions; and 2) Lack of complete information, because events occur that are unpredictable and can affect outcomes. All of this should make everyone very humble about forecasting, and less eager to make sudden changes in investments.” Hear, hear! For more on today’s Fed forecasts, please see “Pessimism and the Fed’s ‘Hawkish’ or ‘Careful’ Pause.”

MarketMinder’s View: Please note that MarketMinder is nonpartisan, neither for nor against any party, politician or policy, as we believe political bias can lead to mistakes when investing. We assess political developments simply to evaluate their potential impact on the economy and markets. With a month-end deadline nearing for Congress to pass a budget—and avert the titular government shutdown—“[House Speaker Kevin] McCarthy abruptly canceled plans to advance a short-term spending bill that would fund the government for 31 days while changing US immigration rules and cutting domestic agencies by 8%. Later in the day, five ultraconservatives, in protest of the broader spending negotiations, joined Democrats to block consideration of a military spending package laden with conservative priorities. ... But some veteran House Republicans concede it may be time to start negotiating with Democrats to get a bill that can pass both the House and the Democratic-led Senate.” If McCarthy agrees to a bipartisan approach, though, he risks drawing the ire of some in his party—and per House rules, it takes just one member of Congress to call for a vote to remove McCarthy as speaker (through a “motion to vacate”). How all this plays out is unknown, and with crunch time approaching, attention—and doom mongering—may ratchet up to fever pitch. But short-term volatility notwithstanding, investors can take heart in knowing no recession or bear market has ever resulted from a government shutdown. Even the longest shutdowns had minimal economic impact, and they were too widely watched to shock markets. We don’t see this time as any different. For more on why, please see last month’s commentary, “Getting Ready for a Shutdown Showdown.”

MarketMinder’s View: The numbers upfront here seem overwhelming: “Global debt hit a record $307trn (€288trn) in the second quarter of the year despite rising interest rates curbing bank credit, with markets such as the United States and Japan driving the rise, the Institute of International Finance (IIF) said yesterday. The financial services trade group said in a report that global debt in dollar terms had risen by $10trn in the first half of 2023 and by $100trn over the past decade. The latest increase has lifted the global debt-to-GDP ratio for a second straight quarter to 336pc. ... Experts and policy makers have warned in recent months of rising levels of debt, which can force countries, corporations and households to tighten their belts and rein in spending and investments, in turn crimping growth and hitting living standards. More than 80pc of the latest build up had come from the developed world with the US, Japan, Britain and France registering the largest increases.” As big as these numbers are, viewing debt in its absolute amount or as a percent of GDP isn’t the best way to scale it, in our opinion. To determine whether debt issuers are liable to default, look at their ability to pay—debt payments relative to revenue. Some outfits have their own metrics to measure this, (e.g., the Bank for International Settlements tracks its own debt service ratios, or DSRs, which suggest debt today isn’t problematic). We also look at how interest payments compare to income, which can be tricky to find in publicly available information. But where robust datasets exist—e.g., the US and UK—debt doesn’t appear to be a looming crisis. Rising debt is a source of perennial fear, but putting it in proper perspective shows a wide gap between reality and expectations—bullish for global markets.