Question of the Week

Is there such a thing as good government debt? If so, what justifies it?

Welfare programs
Military spending
Social programs

It’s the tale of two markets: large-cap blue-chip stocks and bellwether names that have been in park for most of the summer. In fact, the S&P 500 is now in its narrowest trading range over a 40-day period in more than 100 hundred years.  It helps when an index doesn’t go down; it’s been 50-days since the index has endured a decline of more than 1%.  The other end of the spectrum is the NASDAQ and Russell 2000.

For many, this is a maddening development underscoring an out-of-control market ready to pop. And yet, if you put more stock into forward price-to-earnings ratio, trailing the Russell isn’t wildly off the charts.  That said, it’s the kind of index you ride while it’s hot (UP 11% YTD) and jump off once it’s clear the tide has turned.

Equity Indices	DJIA	S&P 500	NASDAQ	Russell 2000
PE (trailing)	20.0	24.7	23.9	Nil
PE (forward)	15.8	18.0	20.4	18.1
Dividend Yield	2.53%	2.11%	1.29%	1.54%

Yesterday, the NASDAQ closed at a fresh all-time high point after rallying for the fourth consecutive session.

Take This Job…

Job openings reached an all-time high in July, and more and more people are saying take this job and shove it!  Generally, that’s good news for everyone except those businesses that must pay more money to hire and to retain talent. 

On that note, the number of people quitting their jobs leaped 9.3% from a year earlier and this certainly sets off alarms at the Federal Reserve since we know this is a favorite indicator on Janet Yellen’s infamous dashboard.

She has always said that when people quit their jobs enmasse, it’s a great sign for the economy. I am not sure this moves the hike-needle ahead of the election, but it’s a harbinger of higher wages, which is critical for a market trading above the long-term valuation trend line.

Much is going to be made over the headline number and the so-called skills gap, but there is no denying there is a significant momentum in job openings this year when you consider the depths of 2009 (up more than three million since).

The quality of jobs is, of course, key as this has been a low-paying job recovery to date. Job openings plunged in the mining sector to 13,000 from 23,000, but thankfully, they climbed in construction to 214,000 from 151,000. I am not sure about the economic impact as jobs in arts and entertainment almost doubled to 106,000 from 65,000. 

 

July Job Openings Highlights	2015	2016
Total	5,788,000	5,871,000
Mining	23,000	13,000
Manufacturing	366,000	379,000
Arts & Entertainment	65,000	106,000
Wholesale	210,000	165,000
Information	116,000	79,000
Financial activities	366,000	321,000

However, there is the correlation between job listings and quits that are most important for Fed policy.  The pace of quits is supposed to signal higher wages. These anecdotal signals have yet to deliver-I thought a spike in wages was in the offing months ago.

• Job Openings 5,871,000 +1.45
• Quits 2,980,000 +9.3%

Hey Big Spender

The minute you walked in the joint,
I could see you were a man of distinction,
A real Big Spender,
Good looking, so refined.
Say, wouldn't you like to know what's going on in my mind?

-Cy Coleman &Dorothy Fields

If you ever get a chance, check out a version of the song ‘Big Spender’ by Shirley Bassey. Meanwhile, we have two presidential candidates that are going to spend a lot of money.  The question is how much of that cash is borrowed and how much of that cash is generated by fiscal policies.

Remember when this image used to frighten and anger Americans, evoking rally cries around the burdens we were leaving our children and grandchildren? 

http://www.usdebtclock.org/

The frustration sparked the creation of the Tea Party movement which gained political influence as Americans witnessed our government engage in runway spending and unfathomable amounts of debt.

Shortly thereafter, a worst-case scenario played out with Greece and its debt crisis and the implosion of Europe’s social welfare-driven economy.

Congress responded with the Budget Control Act of 2011 that some thought would not go into effect, but it did the next year when a budget couldn’t be reached and the word sequestration entered our lexicon. The goal of reducing spending by $2.4 trillion over ten years equally applied in dollars, not in percentages.

The results have been lower deficits. The fact is that non-defense spending will be lowered 7.8% to 5.5%, up to 2021. However, defense spending is taking a 10% to 8.5% hit. This has gutted the military through reductions of military bases and through combat preparedness.

Now, both candidates support ending the sequestration on defense spending.

There is no doubt that in a more dangerous world that it will eventually see an arms race in Asia that will create as much anxiety and risk as the Middle East calls for a more prepared American military presence.  But some wonder if this “Walk softly, carry a big stick” posture is an act or a cover for the military industrial complex that has resulted in billions in cronyism and corporate welfare from time to time.

Today’s Session

The market was holding up pretty well even after the ECB decided to hold the line on rates, but the street seems disappointed that Super Mario is not expanding its monthly bond purchasing at the moment. We are waiting for crude inventory numbers to be released, which could help stocks as signs point to China demand coming back.

Comments

Welfare and social spending are not Constitutional responsibilities of the District of Columbia UNITED STATES federal government corporation. Military support is the responsibility delegated to the federal government in the Constitution. Daria Schooler (DoctorObvious) on 9/8/2016 8:00:27 AM

All government debt is bad! Why can't the government cut spending and live within it's means like the rest of us? They waste our money we send in taxes!!! Harriet Aristeguieta on 9/8/2016 9:55:37 AM

Government debt is to be used as a National Survival means. Life or Death. Not as a means of political policy. z on 9/8/2016 10:22:18 AM

Very good point Daria. E.V. Wagoner on 9/8/2016 3:02:50 PM

Defense is the only justification. RANDY B DELTORTO on 9/15/2016 6:10:05 PM

Military spending is a necessary evil. However, a way must be found to ring out all the frivolous spending within the defense department. Werner J Dornacker on 9/17/2016 2:03:53 PM

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