June 7, 5:00 pm EST
We’ve talked about the set up for positive surprises in the data. We’ve looked at the first two components of GDP (consumption and investment) both of which are set up for positive surprises. Today let’s look at government spending.
It’s typical for debt to balloon in economic downturns. Not only did our debt/gdp ratio balloon in the U.S. but it ballooned everywhere. With that, as the global economy was being propped up by central banks, for the better part of the past decade, the politicians were reluctant to help on the fiscal side. Instead, they went the other way. They went the path of austerity. They focused on debt when the economy desperately needed growth.
Fiscal tightening in a widespread global recession is a recipe for tipping it all into depression. That required the central banks to do more, and more, and more to keep the economy from entering into a deflation spiral — fighting the drag of fiscal belt tightening. And it all began tipping over the edge in mid-2016.
But that changed with Trump election. Trumponomics has been all about restoring growth and breaking from the rut of economic stagnation. And a key pillar in that plan has been infrastructure and government spending.
On that note, he’s been pushing for a trillion dollar infracture spend over 10 years. And as we’ve discussed, while adding debt isn’t popular for the politicians to approve, natural disasters last year gave them an excuse to approve spending packages. Fast foward just six months and we’ve had more than $200 billion in aid approved from Congress. And now we’ve had an increase of $400 billion in government spending as part of the lastest government budget.
So the government spending piece has been in motion. And expect the rest of the world to follow. As we’ve discussed in recent weeks, we’ve seen the populist push back across the world, from Grexit, to Brexit, to the Trump vote, and now to the “Italy first” movement. The real fight in the “populist movement” is against economic stagnation. And much of that is due to mistakes on policy in response to the global economic crisis. And the core mistake has been austerity. Growthsolves a lot of problems.
What about the debt?
The media loves to talk about the $20 trillion dollar debt load, as if we are going to default and/or the rest of the world is going to dump our Treasuries and send interest rates skyrocketing and implode our economy.
Government debt and deficits are judged (by global trade partners, allies, global allocators of capital) on a relative basis – size relative to GDP. Again, our debt relative to GDP has ballooned since the global financial crisis. But it also has for everyone else in the world. That’s why people/countries are still plowing money into our Treasury market for virtually no return, because lending the U.S. money is still the safest place and way to preserve wealth.
The only alternative in this post global financial crisis environment is to focus on growth. Growth can solve a lot of problems, including the debt and deficit relative to GDP problems. As growth goes up, our debt relative to size of the economy goes down.
If we get the economy back on a sustainable growth path, then, in good times, we can work on the structural flaws that led us to the crisis. That’s the only option.
So, when we look at the components of GDP, the policy execution in Washington has been driving lift-off in all of the components. And yet the experts have still underetimated the potential for a growth boom. We’ve talked about the positive surprises that are coming down the pike in consumption, investment and govenment spending. Tomorrow, we’ll take a look at the trade piece.
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