A New President, A New Baseline

With the inauguration of a new President, it seems appropriate to identify a new economic and market baseline as a fresh starting point for the incoming administration.

First, the conditions President Trump is inheriting then we’ll see how those conditions stack up to his five immediate predecessors’.

All data as of 12/31 of year prior to inauguration unless indicated otherwise.

There are many observations to be made, but I’ll focus on a few I find particularly interesting.

Total Federal Government Debt as a % of GDP
Notice that the debt of the federal government continues to grow in both absolute terms and also as a percentage of GDP (GDP is commonly used to measure the size of the U.S. economy). When President Reagan came into office the federal government debt as a percentage of GDP was 31%. Today it stands at 107% of GDP. This is unsustainable, especially when the private sector is so heavily indebted as well (see below).

Total Credit Market Debt as a % of GDP
Whereas the statistic above only measures the federal government’s share of debt, total debt includes the debt of governments, corporations, and individuals.

This measure has also been rising dramatically since when President Reagan first took office at which point total debt was merely 162% of GDP. Now it stands at 351% of GDP! It peaked at the end of President Bush’s term (376%).

This debt burden is not sustainable either, and we may have already seen the peak. If that’s the case, we’ve been in the beginning stages of a long deleveraging cycle. Deleveraging cycles are often deflationary and create headwinds for economic growth. This would help explain the extremely low rates of GDP and income growth since the financial crisis.

Market Cap / GDP
I reviewed this metric in my last commentary titled “The Second Longest Bull Market Since WWII. How Will It End?” It is an important measure of market valuations and has, historically, been a reliable predictor of subsequent 10-12 year market returns. See Hussman, Red Flags Waving from December 19, 2016.

Market Cap / GDP was 0.45 when President Reagan took the reins. It then rose during one of the greatest bull markets in history through the dot-com bubble to 1.16 where it stood when President Bush took over. Of course, it fell when the dot-com bubble burst but then reversed course again as the housing bubble was inflating. As expected, it contracted when that bubble popped as well.

President Obama took over with a much more reasonable ratio of 0.66. However, market cap / GDP has since skyrocketed during the recent bull market to where it stands now over 1.2.

Market Growth as measured by the S&P 500
Unsurprisingly, market growth appears to have had a strong relationship with Market Cap / GDP (market valuation) discussed above. Generally, it appears that the higher market valuations were at the beginning of a President’s term the worse the market performance during the term and vice versa.

Interest Rates and Debt
When President Reagan took his seat in the Oval Office for the first time the 10-Year Treasury rate was 12.8%. Luckily, both the public and private debt burdens were relatively low. Can you imagine if rates on U.S. debt rose to those levels today with current debt levels? We would not even be able to afford the interest payments.

For example, imagine a 5% interest rate on $20 trillion of federal debt. That’s $1 trillion a year just in interest payments alone! Now imagine a 10% rate. Take it a step further and apply those interest rates to the total debt across the entire U.S. economy, which is closer to $65 trillion. An average 5% interest rate would equate to interest payments exceeding 17% of GDP!

Monetary Base
In any economy there are several different measures of a country’s money supply. The reason there are different measures is because there are different forms of money (e.g. currency in circulation, bank reserves, checking / savings deposits, insurance cash values, credit card balances). In the United States, the Monetary Base is the narrowest definition of money. It is the portion of the money supply which the Federal Reserve controls directly. Monetary Base (MB) includes all currency in circulation as well as banks’ reserve balances with the Federal Reserve Bank (the banks’ bank).

Notice the sharp, hockey-stick growth in MB since President George W. Bush took office. It has grown from $0.6 trillion to over $3.5 trillion peaking out at over $4 trillion! Why? The Federal Reserve created and injected the economy with massive, unprecedented amounts of money during and since the financial crisis. You’ve likely heard this referred to as Quantitative Easing, or QE. It’s also referred to as “Monetary Stimulus.”



Always consult a professional advisor who intimately understands your goals, resources, risk tolerance and unique circumstances before making significant investment decisions.

Past performance is no guarantee of future results. Data from third-party sources is believed to be reliable but accuracy cannot be guaranteed.

This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. Ken Melotte may have positions in securities or investments mentioned in this publication, which may change at any time without notice. The information herein may include preliminary information and/or “forward-looking statements.” Due to numerous factors, actual events may differ substantially from those presented. Any opinions expressed herein are current only as of the time of writing and are subject to change at any time without notice.

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