The Threats You Don’t See By: Gabriel PotterMBA, AIFA® 2018.05.02

When the 2000 era technology market pullback occurred, there was only limited griping from commentators and economic analysts because the meteoric climb of dot-com prices were assumed by many experts to be an unstable speculative bubble for an untested market segment.  Even while withstanding jarring real-world terrorist attacks and escalating geopolitical violence, the US markets underwent a relatively systematic and controlled deflation during that era.  In contrast, the 2008 housing collapse caught many experts off-guard because of the presumption of sophistication and safety in the financial sector.  The Great recession was brutal, swift, and deep.  The lesson we draw is that it is in your best interest to consider threats and worst-case scenarios.  A risk unseen is a risk un-managed. 

At an institutional level, the risks we will highlight in our forthcoming edition of Confero regard cyber-security.  If you, as an institutional investor or representative, are looking for something constructive you can do to safeguard the assets under your care, this issue of Confero will alert you to threats and recommend solutions.

Sadly, the existential threats we face as one voice in a sea of millions are a little harder to manage.  If you’re an advocate of US & global investors (as we certainly are), you may have been heartened by the returns this past year but alarmed by a growing threat which is increasingly ignored – debt and borrowing in the bond market.  The signs are there.  The US borrowed a record high - $488 billion dollars – in the first quarter.  Moreover, the Congressional Budget Office sees the deficit – just the deficit, not the already accumulated debt – rising to $1 trillion by 2020.  Bloomberg reports that federal spending is outpacing revenue growth three-to-one.  Yes, the US GDP, growth, and earnings numbers look pretty good right now, but it is growth on the back of borrowed cash.  Someday you have to pay that back and, when you do, future growth is inhibited.   So we’re just borrowing against our future to meet an arbitrary growth goal for today’s political posturing.  Last week the 10-year US treasury yield hit, and sustained, 3% for the first time in years.  So we expect direct borrowing costs to increase while the interest payments for what we already owe will compound our problem.  Certainly the US has the assets on-hand and revenue potential to pay back its debts – we aren’t suggesting anything so radical as the insolvency of the US.  However, we are legitimately concerned global investors’ earnings projections, which are predicated upon borrowed money, have underestimated the impact of inevitably paying back those loans.

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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