When I was a young boy, every once in a while my father would take us to Circus Circus. It is a hotel and casino on the strip where there is a promenade with games. You buy tickets to play the games and if you win a game like skeetball, video games, or shooting baskets, you can win prizes. Every thirty minutes or so there is a circus act with gymnasts. Even today, nearly fifty years from when I first attended, many families go to Circus Circus to enjoy the shows and games. The centerpiece of many circus acts are clowns. Clowns are people who joke and persistently play the role of a buffoon, or a fool. I bring up clowns because of the financial situation of the major countries of North America. Instead of relying on traditional economic terms like gross domestic product, growth, national debt, interest rates, and the like, a more applicable term might be given to the current approach to finance: let’s call it, shall we, Clownonomics. Act one in Clownonomics is the leading country in the world by gross domestic product, the United States.
The current official debt in the United States is 27 trillion dollars. It does not include off balance sheet liabilities, which could approach 70 trillion dollars (things like Medicare and pension obligations). In 2020, the government ran a deficit of $3.7 trillion dollars. 2021 projections are a deficit of 2.3 trillion, but we are only three months into the year. The country just passed a 1.9 trillion dollars ‘recovery package.’ It appears the existing leadership is keen on proposing another three or four trillion dollar spending plan. All this spending is taking place at a time when the citizens are getting vaccinated in an effort to move past the Corona virus pandemic. Many critics of the recently passed stimulus believe about 15% of the 1.9 trillion that will be spent is actually corona virus related. The rest is a reward to states and cities badly in need of funds because of their own fiscal profligacy (New York, California, Illinois, New Jersey). The United States is currently the largest debtor nation in world history and it appears it has every intention of extending this lead. Next up, it’s friendly neighbor to the north, Canada.
Canada currently has an existing debt burden of 1.2 Trillion dollars. In 2020, it ran up a deficit of nearly 400 billion dollars. It is projected to run a 350 billion dollar deficit in 2021. Debt to GDP currently stands at 49%, but is up from 31% in 2019, and will end 2021 at nearly 70%, which looks somewhat good compared to the 98% number in the United States. Canada has two different economies. One is tied to the large cities of Toronto, Vancouver, Montreal, and Ottowa. The other is based on the western and middle provinces and revolves around energy. The current leader of the country and it’s party have been quite active in presenting obstacles to the energy industry. An interesting strategy if you consider that the world’s most menacing countries are focused on energy, either producing it or obtaining it. If you own an asset you know is valuable, is it logical to impede your own production? The same can be said of the current occupant in the White House. Looking ahead, the energy issue will only become more prevalent as both the United States and Canada embark on a spending orgy in order to move to a more green approach. Electrification is the basic concept, and the shift will require trillions and trillions of dollars of spending to refit buildings, build electric charging stations, and create a more robust electric grid which can support wind and solar power. Storage is also an area which has to be addressed, and yes, it requires more spending.
Let us briefly mention Mexico, our neighbor down south. The current president is also a big believe in the ability of government to solve problems. He is spending eight billion dollars to have the Mexican government create and run an oil refinery. The largest oil companies in the world have pulled back in Mexico because of the government controlled approach to energy production, refining, and marketing. The leader is a populist who is known for not having a bank account and has not had one in thirty years. Clearly, his capital and financial markets is limited, and his interest in learning about or using modern day finance is non existent. So, we have the leadership of the largest North American countries engaging in clownonomics. Why does clownonomics matter?
The reason why it matters is because eventually, the underlying currency of a country can either be a store of value, or if debased, can erode the confidence and worth of the monetary mechanism which is used by it’s citizens. If you look at what happens to economies which have debased their currencies over history, think Germany post World War One, the British Pound in the early 90’s, Zimbabwe over the last twenty years, and today Venezuela, well none of it is good. Currently, financial markets are expecting economic expansion after the pandemic, and it is reflected in equity prices. The explosion of the price of Bitcoin is interesting as it shows an inherent distrust in the value of fiat currencies. Stock valuations are based on profits, but the profits are given in underlying currency values. The biggest potential weakness in the equity markets are the debasement of the underlying currencies across the globe. The time element of the unpredictability of exchange rates, which also takes into consideration interest rates, inflation, and GDP growth rate differences, is impossible to forecast. So how do you think about investing with the clown show in full swing? Hard assets like land, oil, gold and silver, and real estate are the prime focus. At some point, and who knows when, foolish leaders ultimately will hurt their citizens (subjects). In the markets last week, the tail end of earnings season continued as Oracle, MongoDB, Dicks Sporting Goods, and HR Block all reported earnings surprises but Oracle’s guidance put a damper on things. The ten year treasury continues to spike with the expectation of inflation in the future, and technology bore the brunt of that spike. Finally, the lead clown of the show, President Biden, visited a small business and couldn’t remember the name of his Secretary of Defense. Given he is on a different planet, maybe Mr. Bezos or Elan Musk can give him a ride to Mars as that is where they are headed anyway. On that optimistic note, thanks for your time and I hope you enjoy the weekend.
Thank you for reading the blog this week, and if you have any questions about investing, please email me at firstname.lastname@example.org. Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.