PHOTO: Graph of the Federal Debt as a Percentage of Gross Domestic Product real and projected from 1790-2046 shows how it ran up before World I, which preceded the Great Depression, and then the Federal debt rose again due to World War II spending. After World War II the U.S. continuously worked down its debt until the U.S. President Ronald Regan sold Congress on the popular Republican theory that growth would solve the debt problem created by his agenda of cutting the tax rate paid by corporations and individuals. When this theory was tried out and disproven by actual experience, the U.S. President Bill Clinton compromised with the Republican Congress to actually raise taxes, which lowered the Federal Debt before Republicans gained control of the White House and Congress once again made the false promise they would balance the budget and also reduce the debt. The debt increase slowed during President Obama's term, mostly because Republicans forced budget cuts to the favorite projects of the Democratic Party. However, today the debt is projected to climb again due to the promises made by the Republican President Donald Trump to cut taxes like Reagan did, and to similarly solve the consequential deficits with growth according by using the plans of the Republican Congress to use "dynamic scoring" for future effects of legislation on the debt, contrary to their balanced budget rules they imposed on President Obama. I added annotations to the original graph above published in a business magazine's opening remarks that said, "President Trump Promised to Eliminate National Debt in Eight Years. Good Luck with that his administration plans to balance the budget with what he says will be huge gains in economic growth. Trump likes to point out that Obama presided over a huge increase in the federal debt. But it made sense for the government to run deficits during and immediately after the 2007-09 recession. With its deep pockets and solid credit, the U.S. used that deficit spending to offset retrenchment by households and businesses, thus preventing an even deeper downturn. Now that the unemployment rate is below 5 percent, there's less scope for stimulus. At least that's the Federal Reserve's position: Even before Trump has revealed his budget, the Federal Open Market Committee has indicated it's on track to raise interest rates three times this year to prevent inflationary overheating of the economy." (Quoted from Peter Coy, "The Trump Deficits in Trump's Future," Businessweek, Mar. 13-19. 2017, p. 9)
President Trump is egotistically taking credit for the good stock market performance during his first days in office, even though he has done nothing except to make big promises about cutting taxes and eliminating government regulations. Given Trump's pretentious promises combined with some market valuation data discussed below, I am concerned that the U.S. economy is headed for a Great Trump Depression.
Some of the measures of stock market valuation are gloomily mentioned in the same issue by Suzanne Wooley, "You can't retire on the Trump bump: US stocks keep booming but may not deliver the long-term returns hope for," Bloomberg Businessweek, Mar. 13-19, 2017, p. 38-39, to make the case that Baby Boom Generation retirees, whose retirement checks depend on the performance of the stock market, need to heed the data linked to from the Home page of Robert J. Shiller Sterling Professor of Economics Yale University yale.edu accessed Mar. 12, 2017 -- "ONLINE DATA ROBERT SHILLER," www.econ.yale.edu/~shiller/data.htm accessed Mar. 12, 2017. Specifically, Shiller's Webpage says this data documents "The data collection effort about investor attitudes that I have been conducting since 1989 has now resulted in a group of Stock Market Confidence Indexes produced by the Yale School of Management." Schiller's Webpage includes a spreadsheet containing the data used for C.A.P.E. analysis of start market valuations: Robert Shiller, "U.S. Stock Markets 1871-Present and CAPE Ratio," yale.edu accessed Mar. 12, 2017 (.xls format spreadsheet).
Commenting on the history of stock market performance, which many retiress have become dependent on for income, Business week said:
"One effect of that long rally is that stocks look relatively expensive. The average price-earnings ratio for stocks in the S&P 500 is 18.3, based on consensus estimates of 2017 earnings. That’s near the high end of the historical track record, says Fran Kinniry, a principal in the investment strategy group at Vanguard Group, which manages more than $4 trillion in assets. And when he looks at other valuation measures—such as those based on companies’ revenue or free cash flow—they’re all in the top 25 percent of historical readings. . . .
"Similarly, Shiller points to a measure he helped popularize, called the cyclically adjusted p-e ratio, or CAPE, which compares prices with the average of earnings over the past 10 years to smooth out the ups and downs of the business cycle. When the CAPE is high, Shiller has found annual returns will tend to be lower over a long period. A low CAPE augurs above-average returns. . .
"The average CAPE ratio for U.S. stocks over the past 100 years was about 17. It stands at 29.6 now—the only times it was higher were in 1929 and around the dot-com bubble, Shiller says. Those are worrisome precedents, but he’s quick to point out that during the dot-com episode the valuation multiple climbed to above 44 in 1999."
Coincidentally, in addition to the Businessweek coverage of stock valuations, a major retail stock broker's magazine, which they regularly mail to its customers, also cited the CAPE prediction of future stock market gains. (See "Is the stock market overvalued? The CAPE ratio may help you evaluate this on a long-term basis," Scwhab On Investing, Winter 2016, p. 8.)
(Also see "Cyclically adjusted price-to-earnings ratio," From Wikipedia accessed Mar. 12, 2017 that says, "The cyclically adjusted price-to-earnings ratio, commonly known as CAPE, Shiller P/E, or P/E 10 ratio, is a valuation measure usually applied to the US S&P 500 equity market. It is defined as price divided by the average of ten years of earnings (moving average), adjusted for inflation.")
All I know, is that the future of the stock market is unpredictable, and retirees like me, who may not live a long enough time to ride out a big market drop, need to invest our retirement savings in a conservative manner, where we make sure we have enough stable income to survive in the event of a market drop, but also have enough invested to profit from any upside to the market and protect ourselves from inflation eating away any fixed income as it did circa 1980. In my case, I have a portion of my retirement account invested in a bond ladder of ten, 10-year Treasury Inflation Protected Securities staggered at one year intervals so that the bonds don't all come due at once. These TIPS are like other U.S. Government treasury bonds, but they are adjusted annually by the CPI-U Consumer Price Index of inflation, and in the event of deflation, you are still guaranteed by the full fail and credit of the U.S. Government to get back your original amount plus the interest.
Finally, some loosely related notes written to myself. Also in the same issue, "Wealth where the living is easy," Businessweek, Mar. 13-19, p. 41, shows a map of the U.S. State where passive income earners took in an average of $20,000 per year. (Passive income is from interest, dividends, rents, etc., and not earned income obtained by working for a living. Of course, a place like Palm Beach, where many rich people live or retire to, the passive income is $176,000. Silicon Valley, where there is much wealth, raises the average for California, for example, Lost Altos Hills has average passive earnings of $124,000. The chart doesn't say if it is really average or median income, but in either case it is interesting, because it shows how few American families have enough passive income to retire on today. I expect this to change over time as family wealth accumulates and is passed on unequally to heirs, who will be like the rich families that existed in America before the Great Depression and were hated by everyone else because they were out of touch with the people who had to work for a living.
I am also guilty of being out of touch because years ago I paid off my home loan and therefore I am unaware of what people are paying for mortgages. (My mortgage from the 1980's had an interest rate of nearly 14% and this forced me to buy a condo instead of a house because I couldn't afford a house loan even with a good salary. Recently, I became envious of younger folks after looking up the "Monthly Interest Rate Survey (MIRS)" Federal Housing Finance Agency fhfa.gov accessed Mar. 2, 2017 and "Mortgage Rates Break Holding Pattern, Move Lower," freddiemac.com March 2, 2017 that said, "30-year fixed-rate mortgage (FRM) averaged 4.10 percent with an average 0.5 point for the week ending March 2, 2017, down from last week when it averaged 4.16 percent. A year ago at this time, the 30-year FRM averaged 3.64 percent." I now understand why young people are complaining about mortgage rates going up, but I still think four percent is a good bargain.
Another loosely related note concerns life expectancy, a key number in planning for retirement. Frepublicans are exploiting the rise in life expectancy as a reason to copy President Reagan, who increased the retirement age from 65 to 67 years old. Some in Congress are calling for raising the retirement age to 70 years old supposedly to keep "Social Security" and "Medicare" solvent, but I think it is really for the same reason Reagan did it, which is their hatred of these FDR and Johnson administration programs, which Republicans really want to eliminate entirely. One IRS life expectancy table ranges from 27.4 years at age 70 to 1.9 years at age 115 and over. (See Previous posts IRS IRA distribution substantially equal payments method (10/6/14) and Fixed amortization option for IRA distribution versus required minimum distributions (8/6/13))