Debt Ceiling Resolution?, Resilient Economy, and a Puzzling Present

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May 28, 2023

DEBT CEILING DRAMA CONTINUED: Our government made it all the way to Memorial Day weekend without reaching a deal to raise the debt ceiling. According to reports late in the day on Friday, negotiators for the Congress and the President were close. On Saturday, negotiators continued to work, and as I update this newsletter on Sunday morning (I usually put it together on Saturday), it is being reported that a deal has been reached. Now a bill has to be drafted, reviewed, and passed quickly. The Treasury Secretary Janet Yellen is now saying that the date the government could run out of money is June 5.

The U.S. debt ceiling has been in place since 1917. We remain one of the very few countries in the world with a debt ceiling. Since 1960, the debt ceiling has been raised 78 times. We’ve seen this drama before, in 2011 and the mid 1990s. Neither episode had a lasting effect on the stock market. It has already affected the stock market this year by making it more volatile. Investors don’t like uncertainty. A primary concern is that U.S. debt will be downgraded again (it was done for the first time in 2011) causing increased borrowing costs for the government and the broader economy. With rates already high relative to recent history, anything that puts pressure on rates to go higher will hurt the economy and the markets. So the sooner a deal is struck the better.

A RESILIENT U.S. ECONOMY: S&P Global maintains a highly respected U.S. composite purchasing managers’ index to track economic activity in the country. According to that index, the U.S. economy grew in April at its fastest pace in a year, and registered its highest reading in 13 months. Of late, the growth is being driven by the services sector, not the manufacturing sector which has been slowing in recent months.

U.S. STOCKS RISE DESPITE THE DEBT CEILING NOISE: Stocks moved down through mid-week before rallying back to provide another positive week. The upward move was led by tech stocks in general and by NVDIA in particular. On Thursday, NVDIA rose more than 24% on its announcement of a very strong forecast of revenues for the next year (led in part by AI driven sales). NVDIA rose another 2.5% on Friday. Marvell Technology rose 32% after reporting earnings that topped expectations. News that a debt ceiling deal was inching closer to completion buoyed markets late in the week.

LONGER-TERM PERFORMANCE: Below are the annualized three-year and five-year numbers for these same indices.

GERMAN RECESSION: For the second quarter in a row, Germany, the world’s fourth largest economy, has registered negative economic growth. This is technically a recession, although many economists no longer use that definition. Nonetheless, the news is not helpful to a region that is trying to develop some positive economic momentum. Households are cutting spending in response to higher prices for food and energy. In March, Germans were paying 21.2% more for their food purchases than a year prior.

HOUSING IN THE U.S.; LOW INVENTORY AND FEW DISTRESSED SALES: Existing home inventory remains historically low in the U.S. as many homeowners now hang on to their homes with low mortgage rates. Most of these existing homeowners have substantial equity due to the recent run up in home values. Thus there will be few distressed sales in the near future. Look at the first graph below. It shows the percentage of homeowners with mortgage interest at various rates. You can see the big bump in those with rates below 3% that happened in the time period before the Fed starting raising rates. Another big chunk have mortgages between 3% and 4%. And you can see that those with mortgages over 6% (all you can get now) is beginning to inch higher. In the second graph, you can see that virtually no homeowners have loans that are more than 100% of their home value (under water), a major problem after the housing bubble of 2007-2009. Most homeowners have lots and lots of equity. This graph does not even include those who have no mortgage at all.

OIL AND GAS ARE FUNGIBLE: Merriam-Webster defines the word “fungible” as follows:

“being something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account.
“Oil, wheat, and lumber are fungible commodities.”

The United States has not built a new oil refinery since 1976. This, of course, limits the amount of gasoline being created in the U.S. Ultimately, if our capacity to refine oil into gasoline does not meet demand, we could either build new refineries or import it from other countries. The way we seem to be managing that now is to make sure demand does not grow by requiring more electric vehicles. If, despite those attempts, gasoline demand continues to grow, gasoline will be available. Other countries are not going to stop investing and building refineries, and oil and gasoline are fungible.

We have been keeping an eye on the economies of various African countries that are learning to be more productive, capitalistic countries. Last week, Nigeria just opened a brand new oil refinery, now Africa’s biggest. It has the capacity to refine 650,000 of barrels of oil per day. It was largely financed by one of Africa’s most wealthy individuals, not with U.S. or European capital. To date, despite being Africa’s biggest oil producer, Nigeria has been a net importer of refined petroleum products. Now they will likely be able to meet domestic demand and become a net exporter. This will also create tens of thousands of jobs in a nation that sorely needs them. If our strategy to reduce demand for gasoline does not work, we may be importing gasoline from Nigeria some day. And if this refinery becomes profitable (a challenge in a country that still has significant security concerns), it might spur more capital going into new refineries in Africa, a land hungry for profits and jobs and ripe for exponential growth.

DON’T BLINK: In the immortal words of Ferris Bueller, “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” Below are two pictures. The time period between them seems like the blink of an eye. Both pictures are of my grandson Judah at the same spot at the Brandywine Zoo in Wilmington, Delaware. The first was taken four years ago. The second was taken this weekend.

A CHRISTMAS PRESENT FINALLY COMPLETED: Last Christmas, I found one of the most memorable pictures of our kids when they were little, and I had it turned into a jigsaw puzzle. I gave it to my wife as a present, but she had no idea what the end result would be. She did not get to it right away, and when she did, it turned out to be rather difficult. So it took a while. She was about two thirds done before she figured it out. It turned out to be a pretty cool present. (And yes, my daughter cried a lot.)

Have a great week!

Our mission is to help you see the objective, find the path, and navigate past the obstacles to a more prosperous future.

Douglas R. MacGray, J.D., C.F.P. ®
Stonecrop Wealth Advisors, LLC

Direct | Cell | Fax
(610) 628 4545

“Learning is a daily experience and a lifetime mission. I truly believe in the saying, ‘We work to become, not to acquire.'” Bill Russell

“Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest.” Matthew 25:27


(c) 2023 A.D., Stonecrop Wealth Advisors, LLC, All Rights Reserved

*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets.
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States.
*Bloomberg U.S. Aggregate: This is a measure of the U.S. bond markets.

Investment advisory services offered through Stonecrop Wealth Advisors, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.




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    Doug MacGray

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    May 29, 2023


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