foxex: $22 Trillion!

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Stocks Rise as Federal Debt hits $22 Trillion

Markets Close

Dow
25,543.27 +0.46%

S&P
2,753.03 +0.30%

Nasdaq
7,420.38 +0.08%

VIX
15.65 +1.43%

INV Anxiety Index
101.71 Neutral

US 10-Yr Yield
2.708 +0.89%

Stocks Rise on Trade Progress

Make that two days in a row of market gains as more news of progress around U.S. China trade talks added some tailwind for investors. The South China Morning Post reported that China's President Xi will meet with U.S. Treasury Secretary Mnuchin and other high-level representatives in China on Friday, as a sign of 'goodwill'. President Trump has suggested that he may push back the March 1 deadline for an agreement to be reached in order to make more progress on the negotiations. Remember - March 1 was the original deadline to the two countries agreed to to hammer out a deal or new tariffs would go into place on March 2.

Either way, this is the kind of news that is galvanizing investors, not fundamentals.

(Check out how the latest positive news has impacted China's Shanghai Composite in James' Chart of the Day, below.)

Apple to Push Streaming Service

There are several reports circulating today that Apple will make a bigger push into a subscription streaming service in late April or May. The company reportedly intends to launch a service for customers on its devices that offers free original content as well as subscription only content for a fee. Apple is in talks with CBS, Viacom, Lionsgate and other media companies for that licensed content, per CNBC. Guess who is not invited to the Apple party? Netflix. HBO may also not be included, per reports.

Why it Matters

Apple, Google, Amazon and Facebook, for that matter, want to do everything they can to keep users in their own ecosystems. They do not want users to open another app to enjoy their entertainment, read news, shop or engage with their families and friends. Control the medium, the message and the device. Marshall McLuhan would have a field day in 2019.

Apple is also trying to find other revenue streams as iPhone sales are weakening. iPhone sales fell 15% in the past quarter, causing Apple to report its first decline in revenue and profit in a decade. To that end, it has been pushing its 'Services' business which includes app-store sales, streaming-music subscriptions and mobile payments.

The WSJ reports that Apple is targeting $45 billion in revenue from that segment in 2019 and more than $55 billion in 2020. Apple brought in $265.5 billion in revenue for all of 2018, so this is a small business, relatively speaking. The WSJ charted Apple's Services revenue to date along with company projection for the next two years.

Federal Debt tops $22 trillion

This shouldn't come as a surprise to anyone, but the numbers are still staggering. At $22 trillion, it's the highest it has ever been, and there are no signs of it slowing down. It has increased by $2 trillion since Trump took office and went up nearly $10 trillion under Obama. Blame falling tax revenue and higher government spending for the increase.

The Congressional Budget Office estimates that the federal debt will top $29 trillion by 2029. Our kids and grandkids will curse us for this someday.

Why it Matters

The numbers, in and of themselves are staggering. But in isolation, they don't mean much. What is important is the debt to GDP ratio, which has also been climbing at a ridiculous pace.

The debt to GDP ratio is important because it is a measure of the government's ability to pay down its debt through growth. It is also a measure of the growth the debt is able to help generate. If a country's economy is growing and debt is under control, that economic growth can translate into higher productivity gains, which makes more government funds available for borrowing for things like infrastructure and education. When a country's economic growth is slowing and debt continues to rise, it can trigger a wider economic slowdown and deter investors from buying U.S. Treasury bonds and other instruments.

This is what the dent to GDP ratio looks like today, per the St. Louis Fed.

Alexander Hamilton, the nation's first Treasury Secretary, was a proponent of debt... but not debts we would never pay. Here is what he had to say about it in his "Report on Public Credit", in 1790:

"This reflection derives additional strength from the nature of the debt of the United States. It was the price of liberty. The faith of America has been repeatedly pledged for it, and with solemnities, that give peculiar force to the obligation [of paying off the debt]."

Chart of the Day: Rising Trade Optimism Lifts All Boats

Continued optimism over the prospects of a potentially successful U.S.-China trade deal has helped lift both U.S. and Chinese markets. As we noted yesterday, President Trump said on Tuesday that he would consider postponing the current deadline for U.S.-China trade negotiations. This helped boost confidence that both sides would likely do what it takes to get a mutually beneficial deal done. In turn, any success with a trade deal would bode well for China's slowing growth, as well as the U.S. economy. U.S. negotiators, including Treasury Secretary Steven Mnuchin, are in China and slated to meet with Chinese President Xi Jinping on Friday. The absence of a signed agreement by March 1 (or any postponed deadline by President Trump) would prompt increased U.S. tariffs on Chinese products.

Market optimism that a deal may indeed be reached in the near future has helped boost both the S&P 500 and the Shanghai Composite (index of all stocks traded on the Shanghai Stock Exchange). The chart above shows both major benchmark indexes rallying sharply since the beginning of the year. The Shanghai Composite has been particularly strong this week as U.S. and Chinese negotiators work to hammer out a deal in Beijing. On Wednesday, the Chinese benchmark index broke out above a major double-bottom pattern, which is a strong bullish signal for the Chinese markets.

When the two indexes are placed in contrast, it's clear that the S&P 500 has performed substantially better than the Shanghai Composite in the recent past. While the S&P 500's 1-year performance is in the low, but positive, single digits, the Shanghai Composite's 1-year performance lags far behind at negative double digits. However, if a solid deal is indeed reached within the next 2-3 weeks, we could be seeing the Chinese equity markets play catch up, as China most likely has significantly more to gain by securing a trade deal than the U.S.