"Kee" Points with Jim Kee, Ph.D.


  • Deficits and Debt
  • LIBOR Change
  • Some Interesting Housing Facts
  • Divisive Politics?

 

Debt and Deficits

Last week was a little quiet on the investment news front, hence the weekend Barron’s cover, “We’re Using the Future for a Fiscal Dumping Ground. Beware Trillion-Dollar Deficits.” Most of you know that I feel the press pulls debt and deficit stories out of the “Armageddon file cabinet” during slow news weeks. Not that the current fiscal situation is sustainable. The government’s annual receipts exceed its expenditures, so it borrows the difference, which is the annual deficit. The years of accumulated deficits are the government’s outstanding debt. Rising interest rates will increase the costs of servicing that debt. Also, the burden of the debt is greater to the extent that the funds were consumed (i.e. transfer payments) rather than used to build an off-setting asset to service the debt. In that sense government debt is no different than individual debt: if you go into debt in order to get a medical degree, you’ve created an offsetting asset (yourself) that can service (generate income) the debt, and your net worth has probably increased. If instead you borrowed the same amount but spent it all gambling, you’d have created a debt without creating an off-setting asset to service that debt, so your net worth (assets-liabilities) would decline. Economists debate how much of current government borrowing is merely consumed versus creating assets. That’s why politicians on both sides of the aisle like to call their spending programs “investments."


There is no way that pending Medicare, Medicaid, and Social Security commitments can be met under current conditions. So current conditions will change, which can mean anything from means-testing of benefits (the more you have the less you get), to increasing payroll taxes and qualifying ages, to changing the inflation calculations used for benefits. In fact, the Penn (University of Pennsylvania)-Wharton Budget Model’s Social Security Simulator alone allows users to see how up to 648 different reforms to social security can affect its viability. So don’t expect government debt Armageddon, but do expect changes to existing programs. And given the incentives that Congress faces, don’t expect those changes until the last minute.



LIBOR Change

LIBOR (London Interbank Offered Rate), a common benchmark of interest rate indices used to set things like adjustable rate mortgages, will be phased out over the next 3 years (through the end of 2021) in favor of SOFR, the Secured Overnight Financing Rate, which was developed by the Federal Reserve Bank of New York. JP Morgan Chase just “re-marked” $107 million of bonds issued in 2001 by New York’s Triborough Bridge and Tunnel Authority, making it the first municipal bond pegged to the new SOFR index (Bloomberg). LIBOR is calculated from a daily survey of about 20 large banks who estimate how much it would cost to borrow from each other without putting up any collateral. It is being phased out primarily because of price-rigging scandals. SOFR, on the other hand, is based upon actual transactions, not survey estimates. About $44 billion of outstanding municipal bonds use the LIBOR benchmark, and the phase-in period should ensure minimal disruption of fixed-income markets as the world transitions to SOFR. Josh Hudson, our Director of Fixed Income, feels that markets have already priced in any impacts from this highly telegraphed move.



Interesting Housing Facts

A recent research report from the UCLA Anderson Forecast Centerhad some housing data that I thought was worth sharing with Kee Pointsreaders. For example, housing starts hit their 60-year low of just under 600,000 homes per year in 2009-10. In 2017 they were up to 1.21 million units, with 1.34 million expected in 2018, but that remains below the 60-year average of 1.435 million units per year. The Center concludes that, “simply put, the housing shortage is for real.” With supply restricted, any increase in demand is reflected in increases in price, which explains why the widely watched Case-Shiller National Home Price Index is at all-time highs. The hottest markets since 2000 have been Los Angeles, Seattle, Denver, Nashville, Austin, and parts of the coastal northeast, while the coolest (poorest) have been places like Chicago and Atlanta. The piece talked about positives for the housing market going forward (e.g. strong employment growth) as well as negatives like higher mortgage rates and low family formation (marriage) rates. But what surprised me the most was the data for birthrates. At about 60 births per 1,000 women (between ages 15 and 44), the US birth-rate is at an all-time low, and that’s going back before 1920. You wouldn’t know that from our experience here at South Texas Money Management!



Divisive Politics?

Media assertions of political divisiveness increased recently as former US President Barack Obama made headlines by critiquing President Trump (without using the word president) and by stumping for midterm Democrat candidates. Supposedly, this breaks some sort of unspoken tradition of ex-presidents fading silently into the sunset. To be honest, I’m not real sure where this notion of an unspoken tradition comes from, because ex-presidents have criticized existing presidents for a long time. The most striking example that I know of was Herbert Hoover’s critique of Franklin Roosevelt and his policies in his 1937 speech to The Chicago Economics Club: “I do not agree with these New Deal objectives, for there are here fundamental conflicts with free men with which there is no compromise, no middle ground.” I don’t think you can get more divisive than “no compromise, no middle ground”!