Hey Friends,

The year 2019 is underway. We have seen major turbulence in the stock market for several months now. After a steep move downhill ended abruptly the day after Christmas, we’ve seen a steep move up since that time. Go here to read one author’s viewpoint on the market activity.

A great jobs report came out last Friday followed immediately by more dovish remarks from the Fed with regard to what’s next for interest rates. The Fed’s task is becoming more and more tenuous because the national debt is growing at an unsustainable rate while we’ve been in an extended period of economic growth. The Fed Chairman, Jerome Powell, is concerned about what’s going on with our national debt (Go here).

Following the Great Recession of 2008 and 2009, low rates and multiple rounds of quantitative easing radically expanded the money supply. Here’s an article on quantitative easing. While all the liquidity added via easing has seemed to take us far away from the dark days of 2008 and 2009, we find ourselves today on the cusp of reaching a national debt of 22 trillion. Every quarter percent increase in interest rates lifts the amount of annual interest on a national debt of 22 trillion by 55 billion dollars.

The Fed needs to clean up its balance sheet after years of radically expanding it. But the Fed is concerned about the national debt expansion, knowing that large annual deficits and increasing interest rates aren’t a recipe for a good outcome. And, of course the stock market likes the low rates that favor lower cost of capital for corporate growth and drawing investment dollars into risky assets (stocks) and away from low safe income producing assets like CDs. But what the stock market wants “today” and what is needed for the longer term economic health may be at odds. Indeed the national debt isn’t an imaginary problem.

So, it certainly seems that the Fed is in a very tough spot in my view. We all know that something should have been done about runaway deficit spending long ago but that’s water under the bridge. Will our stronger economy of the present moment eventually translate into shrinking deficits? Will our leaders reduce government spending and waste? What’s next with the Fed?

In my opinion, the end of 2018 and start of 2019 stock market roller-coaster is largely explained by fear of how this all plays out — the market wanting the Fed to be dovish, but deeper down dealing with the reality that the Fed is facing quite a quandary with where to go with interest rates.

See you next time,

Paul