The positions of the Americans is quite exceptional, and it may be believed that no democratic people will ever be placed in a
similar one. – Alexis de Tocqueville
Chinese startup DeepSeek’s introduction to the world over the last weekend of the month and the resulting Monday, January 27ths 17%
sell off in market darling NVIDIA stock certainly didn’t do anything to “deep six” investor infatuation with all thing tech related. QQQ,
an ETF that tracks the NASDAQ 100, drew $4.3 billion that day from would be bargain hunters, its largest one-day inflow since 2021.
NVDL, a security which is a leveraged play on NVDIA stock, declined 34% that day and attracted a record inflow of $1 billion. Still
though that narrative didn’t quite mesh with the equity markets reality for the month. Information Technology was the sole loser among
the S&P’s eleven sectors falling 2.9%. The equal weight S&P 500 returned 3.5% outperforming the cap-weighted versions 2.8%. The
value share of the index narrowly outpaced the growth side 2.9% to 2.7% and the small cap 600’s 2.9% and the mid cap 600’s 3.8%
returns demonstrated that, at least for this one month, bigger isn’t always best. US investors who hadn’t entirely given up on the merits of
investing in foreign markets were rewarded with foreign developed markets 5.1% and European stocks 7% returns.
American Exceptionalism is a phrase that has come into such common usage these past several years that a google search even offers a
definition though primarily by its effects than its cause. It is a phrase often used in reference to “the Mag 7” stocks which are, of course,
American companies. It is likely that more investors believe in AI’s “the sky is the limit” opportunity to make money in the stock market
than are able to explain what it is but perhaps that explains our higher rates of economic growth and the superior returns of the US stock
market. That our rate of economic growth has been higher than that of most of the rest of the world is certainly true. Of the G7 countries
(Canada, France, Germany, Italy, Japan, the UK & the US) Canada’s rate of economic growth in 2024 of 1.34% was the second highest
but less than half that of the US’s 2.77%. That is a notable reversal of fortune for this country as in the five pre-pandemic years of 2015
through 2019 the US economy grew at a rate of just over 80% of the global rate but in both 2023 and 2024 the US rate of growth
exceeded it by almost 10%. So, two questions come to mind; why is this occurring and is it likely to persist?
That the United States is running very large budget deficits is scarcely new information with our government taking in revenue of
approximately $5 trillion and spending just over $6.8 trillion. The result is an increase in the market value of outstanding federal debt
from 75% of the size of our national economy in 2019 to its current level of 94%. The source of growth in the deficit is attributable to the
rise in federal spending from 22.6% to 24.6% of GDP. The reason for the increase in federal spending is interesting; it’s almost solely
due to the increase in the amount of interest the US Treasury is paying on its debt. It is how that money is borrowed though that matters
most to our rate of economic growth. If that debt is purchased by entities within this country, then, in terms of its ability to stimulate the
economy, it’s basically a wash with those funds withdrawn from the economy to purchase the debt but then reentering the economy as
government spending. In 2024 though, $1 trillion of that debt was purchased with money borrowed from other countries thus allowing
our deficit to serve as a form of economic stimulus.
Perhaps even more interesting than who we’re borrowing the money from is the form in which it is being borrowed. Typically, the US
Treasury uses notes and bonds with maturities of from two to thirty years to fund 60% to 70% of its requirements. Our former Treasury
Secretary Janet Yellen from Q3 2022 through Q1 2024 employed a notably different funding strategy using Treasury bills with maturities
of one year or less to provide 70% of the needed funds. During the pandemic the Federal Reserve added $5 trillion to its balance sheet
through Quantitative Easing or “QE.” Not wanting a sum that large to enter our economy with its likely inflationary consequences, the
Fed attracted half that amount into its Reverse Repo program by offering above market rates of interest on those balances. The US
Treasury, with its very high volume of Treasury bill issuance, then pushed Treasury bill rates above what it was paying on Reverse Repo
balances which money market funds, the owner of those balances, then withdrew to purchase all those newly created Treasury bills.
Those very large budget deficits and how they were financed are likely the true source of American Exceptionalism. As to the likelihood
of its continuation, that question may well be answered by the reality that our debt has grown to such a size that the interest that is being
paid on it that has become a major contributor to our ongoing budget deficits.
January 2025 started 50% fixed income 50% equity investors off on a cheerful note returning 1.82%. The equity share returned 2.9% thus
contributing most of that return for the month mirroring US large cap’s 2.8% but pushed just a bit beyond that assisted by US small cap’s
3.6% and foreign’ s 3.2%. Fixed Income offered returns exceeding their cash flow as 10 Year US Treasury rates closed near their lows
for the month and a hairs breadth lower that their beginning of the year level. Gold continued to shine as, after having risen 26.5% in
2024, it rose an additional 6.4% in this year’s first month.
Mark H Tekamp/February 2, 2025