“I am an optimist. It does not seem too much use being
anything else.”
–Sir Winston Churchill, UK Prime Minister 1940–45; 1951–55
Volume 17
Riding the Roller Coaster of Inflation
Balancing the Books: US Debt Simulation
What Happened in the Markets
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It’s fairly safe to assume we’ve all had the thrill of riding an exhilarating roller coaster. The first few drops leave your heart racing, but as the ride progresses, you realize the initial thrills don’t dictate the entire experience. Similarly, the first quarter’s inflation data might have had us gripping our seats, but it doesn’t necessarily mean we’re on the perpetual ride of rising prices.
In the first quarter of this year, inflation data was indeed uncomfortably hot, sparking concerns of a potential sustained upswing. However, as we’ve highlighted over recent months, there were good reasons not to hit the panic button. The Federal Reserve (Fed), sharing a similar view, reinforced this sentiment. Fed Chair Powell emphasized that the hot Q1 data didn’t erase the progress made in the latter half of 2023. It simply highlights the need for patience in reaching the 2% inflation target.
April’s Consumer Price Index (CPI) report breathed relief. Headline inflation rose by just 0.3%, below expectations. Year-over-year, CPI eased to 3.4%, still elevated but primarily driven by shelter inflation. Stripping out shelter costs, headline CPI was up only 2.2% from last April. The earlier spikes in inflation were mainly due to post-pandemic catch-up effects rather than new demand or supply pressures.
Shelter inflation, a significant contributor to CPI (making up 35% of the basket), has been running on a lag compared to real-time rental markets. The rent of primary residences rose at an annualized pace of 4.3% in April, the slowest since August 2021. Though still elevated, owners’ equivalent rent (OER) showed signs of easing, rising to 5.2% annually in April compared to 5.9% in Q1.
Auto insurance is another post-pandemic outlier, contributing significantly to core CPI inflation. Vehicle prices and repair costs surged post-pandemic, driving up premiums. As the data catches up, actual vehicle prices are now easing, pointing to potential relief ahead.
Combining the contributions from rents, OER, and auto insurance, these categories account for about 85% of the year-over-year increase in core inflation. However, several forwardlooking indicators suggest there’s no cause for alarm. Wage growth is steady, commodity prices are stable, and market and consumer inflation expectations align with the Fed’s targets.
So, as we continue this ride, it seems we can expect a smoother path ahead, potentially even seeing interest rate cuts in 2024. Hold on—but there is no need to grip too tightly—the ride may not be as wild as it initially seemed.
Imagine your finances are like juggling balls. You have bills to pay, a mortgage, maybe student loans to tackle, and a bit of credit card debt. Some months, you juggle effortlessly; other times, it feels like you’re one misstep away from dropping everything. The US debt situation—often depicted as a runaway train or a ticking time bomb—is much like this juggling act. But while the headlines scream catastrophe, the reality might be more balanced than it appears.
The US national debt has surpassed $34 trillion, which may initially seem overwhelming. However, breaking down this number and understanding its implications is essential. Most of this debt is owed domestically (77%), with US investors, pensions, and mutual funds holding a significant portion. This means that much of the debt is essentially money the government owes to its citizens.
One of the most persistent myths is that increasing debt will inevitably lead to economic disaster. However, history and current economic indicators suggest otherwise. During periods of significant borrowing, such as the Great Recession and the COVID-19 pandemic, the US government used its borrowing capacity to stabilize the economy. This action arguably prevented more severe downturns. The jump in debt levels during the pandemic is illustrated below, but it has been slowly diminishing since.
Moreover, the interest rates on US debt are currently low by historical standards, making the cost of borrowing manageable. For instance, while the debt has increased significantly, the interest payments as a percentage of GDP are lower now than they were in the late 1990s.
The second major misconception is that the debt ceiling crisis is inevitable. Political discussions often portray the debt ceiling as a looming crisis. However, the debt ceiling is more of a political tool than an economic necessity. Raising the debt ceiling does not authorize new spending but allows the government to meet existing obligations. Historically, debt ceiling standoffs have been resolved without leading to a default, indicating that the political drama surrounding it often overshadows the practical outcomes.
The last fallacy, the US cannot sustain its current debt levels. While comparing the US debt to GDP might seem alarming, it’s important to consider the broader context. The US economy is strong and continues to grow, providing a stable foundation for managing debt. Additionally, the US has substantial assets, including land, infrastructure, and natural resources—far exceeding its liabilities.
The bigger picture is that sovereign debt, in itself, is not inherently bad. It’s how debt is utilized that determines its impact. For example, government investments in infrastructure, education, and technology can yield substantial returns, fostering economic growth and innovation. Programs like the expanded child tax credit, which significantly reduced child poverty during its implementation, demonstrate how strategic debt-financed initiatives can have profound societal benefits.
Furthermore, the US dollar remains the world’s primary reserve currency, a testament to global confidence in the US economy. This privilege means a constant demand for US debt, providing the government with flexibility in its fiscal policies.
While the US debt is undoubtedly high, the situation is not as dire as some portray. The country’s ability to manage its debt, strategic investments, and economic growth provides a balanced perspective that counters the more alarmist views. The key is not to panic over the size of the debt but to focus on how it’s used and managed. Much like a well-juggled act—it requires skill, timing, and, sometimes, a bit of finesse.
In summary, while vigilance and responsible fiscal policies are necessary, the US debt situation is more a manageable challenge than an impending catastrophe. As the global economy evolves, so too will the strategies to ensure that this economic juggling act continues smoothly. Pessimism may attract attention, but it is frequently unwarranted.
Despite the traditional market adage “sell in May,” equity markets defied expectations by displaying remarkable resilience this month. This serves as a powerful reminder of the value of remaining invested during market fluctuations, consistently proving to yield long-term benefits.
The S&P 500 and US small cap companies closed the month with a solid 5.0% return, bolstering the year-to-date (YTD) returns to 6.0% and -2.2%, respectively. This positive performance was mirrored in global markets, with developed markets returning 3.2% and emerging markets 1.6%. YTD, both indexes remain in positive territory at 3.0% and 2.0%, respectively.
Furthermore, the fixed income markets experienced a positive month with US Treasuries returning at 1.5%, the US Aggregate Bond Index at 1.7%, bank loans at 1.0%, and high-yield bonds at 1.1%.
The markets were uplifted by steady interest rates and economic data that didn’t surprise anyone but was much more predictable than in previous months. We expect a similar story throughout the summer, as markets typically slow down in the third quarter, with Wall Street historically taking a mid-year breather.
As the Chief Investment Officer, Stephen Swensen oversees investment management, research, portfolio design, and all investment-related operations at Atlas. He also chairs the Atlas Investment Committee, guiding strategic investment decisions.
Stephen’s career began as a Financial Analyst for Deseret Mutual Benefits Administration (DMBA), a role in which he managed investments for a private pension fund and insurance company. Subsequently, he served as an investment analyst and portfolio manager for local Registered Investment Advisors (RIAs). Before joining Atlas, Stephen contributed his expertise as an Outsourced Chief Investment Officer (OCIO) for the Carson Group, supporting advisors on the West Coast. Educationally, Stephen holds an MBA and an MS in Investment Management and Financial Analysis from Creighton University. He has earned the Series 65 Uniform Investment Advisor License and is actively pursuing the prestigious
Chartered Financial Analyst (CFA) designation.
Beyond his professional achievements, Stephen is an enthusiastic hockey fan, both on and off the ice. He finds joy in playing the piano, golfing, reading, and outdoor cooking. However, his greatest source of happiness comes from spending quality time with his wife and four children
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