Invisor Economic Update August 2017

Economic Update August 2017 - A Closer Look at the US Economy

by Josh Miszk Last updated on September 07, 2017 Tags: Market & News Updates

In Canadian dollar terms, global developed markets evened out in August. While the month was relatively tumultuous from a geopolitical standpoint, economic news has remained much the same. The Canadian dollar has kept its relative strength versus the US dollar, driven partially on expectations of rising Canadian yields but, more importantly, on weaker demand for USD.  

Index Performance Graph
*Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index

Many Invisor portfolios have significant exposure to the US economy and the USD. While exposure to currencies tends to wash out in the long run, expectations of the US economy have a significant impact on the global economy. We’ll take a deeper look into a few key areas that our clients have asked about regarding the US economy.

CAD to USD Over the Past Year

CAD to USD over the past year graph
Source: Google Finance

Political Risks

This topic covers everything from internal policy changes, like DACA, to uncertainty around North Korea. While geopolitical risks are prevalent, and risks are probably higher than usual, there is always a risk of an unknown “black swan” event. Geopolitical events are the least predictable of any factor on an investment portfolio; to protect against this risk, we build well diversified portfolios rather than trying to predict the unpredictable.

US Debt Levels

From a consumer debt standpoint, student debt levels in the US are the biggest risk with outstanding debt at about $1 trillion and a default rate of 11.2% in 2016. While this is likely something that taxpayers will have to shoulder at some point, it is not nearly as large as the 2008 mortgage debt crisis, and the American taxpayer should be able to carry the burden (student loans are about a tenth of the size of the mortgage market). Besides student loans, the rest of the consumer debt market has only marginally grown and delinquency rates are near historic lows – and so we feel the consumer debt worry is overstated.

US Student Loans and C&I Loans graphs

Some investors are also worried about the broader US national debt (you can watch it grow by thousands of dollars per second here). While the growth seems out of control, it’s important to view debt within the context of the US economy’s ability to service its debt obligations. The simplest way to do that is to look at an economy’s debt-to-gdp ratio. Since the federal reserve is in a phase of tapering the outstanding debt and the economy is growing, overall debt-to-gdp levels, although high, are declining.  While the level is not ideal, we do not believe it’s a cause for concern as the world’s largest economy is still creating enough wealth to pay its bills.

US Gross Federal Debt to GDP graph

US Growth Expectations

We’ve talked a lot about corporate growth and money supply being key indicators for future growth, and these factors also influence the US economy by affecting the demand for money. When investors are worried about future growth prospects, they hoard cash in bank accounts, resulting in this high demand. With many worried investors, this has been the case for some time. 

Now, however, consumer confidence is high, unemployment is low, and saving account growth is starting to slow. What this tells us is that the demand for cash is declining, and people are starting to spend more. An economy that’s spending more drives asset levels higher and thus perpetuates growth. There is a pressure boiling just under the surface that we could see driving inflation soon.

Forward-Looking Strategy

Just like our strategy for long term investments is keeping our eyes on the goal and not wavering with minor changes along the way, our outlook of the US economy is not significant enough one way or the other to drive a change in action. While we believe that the upward pressure on the USD is stronger than the downward, it certainly does not mean that it will take a direct route there. Our recommendation to long term investors is to stick the course and keep your eye on the horizon rather than looking to make portfolio changes based on shorter term currency moves.

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