Notice of Index Modifications: Ferrari ETPs

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Author

Sandeep Rao

Date

U.S. Debt In 2024: A Major Crisis Is Brewing

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In recent times, U.S. debt issuances had become a flashpoint for brinkmanship between various factions of the political spectrum with the legislature. Currently, limits on the maximum allowable debt – which has seen a near-constant increase over the years – have been suspended until January 1, 2025. It can be assumed that the optics associated with the tussle and inevitable carve-outs that arose prior to each “debt ceiling” increase being approved was deemed inconducive, with protracted conflicts arising on procedure over each legislative action taking its place instead.

Overall, it can be seen that America’s addiction to debt has definitive “epochs” relative to its history.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Source: U.S. Department of the Treasury, Leverage Shares analysis

After a massive spike in debt during the course of the Civil War, there was at least some attempt at prudence in the years leading up to the 20th Century. Since the dawn of the 20th Century, nearly every epoch has been met by at least a triple-digit percentage increase in debt. The Cold War period was indisputably the greatest epoch of increase: social benefits were enacted into law, military spending shot up to produce an ever-complexifying array of armaments to face off against the Soviet Union, and “urban improvement” measures attracted ever-increasing sums in intragovernmental transfers.

The dissolution of the Soviet Union and the end of the Cold War did little to halt the nation’s habituation to living beyond its means. As of March 14 of this year, total debt outstanding stands at $34.49 trillion. The activist think tank The Heritage Foundation uses the U.S. government’s own projections to show that there is no off-ramp for this habituation: within 30 years, the average debt imputed on a citizen born in 2023 is expected to rise at least 189%.

Source: The Heritage Foundation

While social benefits account for the majority of the key drivers behind government spending, the interest payable on debt issuances are steadily catching up and accounting for nearly as much as Social Security.

Source: The Heritage Foundation

Over the course of this century, the U.S. government has never had a budget surplus (barring for one single year). If current issuance patterns continue, it is estimated that this deficit will continue to widen: before the end of this current decade, interest payments are slated to overtake all other drivers of spending.

Source: The Heritage Foundation

A recurring talking point among lawmakers has been government waste incurred due to fraud or other reasons. As per the U.S. government’s own numbers, this is certainly true: over the course of the past two decades, a little under $2.5 trillion in payments in total were either improperly done or made to unknown recipients.

Source: U.S. Office of Management and Budget, Leverage Shares analysis

This doesn’t mean that recovery is impossible: over the course of the past decade, the government’s recovery efforts has borne some fruit, with the quarter of a trillion in improper payments made in 2023 reported to have a recovery rate of 75%.

It bears noting, though, that “improper payments” constitute only a fraction of government’s debt issuances. In the Year Till Date (YTD) alone, the government has raised over $484 billion in debt issuances. Over the course of 51 days of debt activity so far, this translates to an average of $9.5 billion per day. 14 of the 51 days of activity saw debts being paid off and nearly each of these days was immediately preceded by a greater amount raised via issuances.

Now, given that each of these debt issuances translates to domestic spending, it stands to reason that this results in dollars being created in the system. Going by latest trends, around $1 trillion in currency is being “created” every 100 days1. Thus, indicators should portray the value of the present-day dollar being in precipitous decline relative to historical values. The indicators don’t necessarily do so.

The Problem with Indicators

It has long been argued that, over the course of time, money spent on purchasing goods and services isn’t quite the same as money received as compensation for said goods and services or money held as wealth. The widely-cited MeasuringWorth Foundation – a non-profit spun off the Economic History Association with most of the same datasets – attempts to capture the valuation of money in historical terms along these lines as determined by widely-quoted economic indicators such as the Consumer Price Index (CPI), the GDP Deflator, et al.

In numerical terms, the further back one goes in time, the larger the value of a single dollar of said time period in the present day. When considering these amounts in annualized accrual terms (i.e. how much the value of the historical dollar rises on an average yearly basis till the present), however, the valuation intuitively might seem a little off.

Source: MeasuringWorth Foundation, Leverage Shares analysis

Considering the fact that total debt (and thus, “cash” created) was nearly five times higher in 2021 than in 1992, one would expect that value of a dollar to be somewhat proportionately affected. The value accrual metric (and even the dollar equivalent amount) doesn’t indicate this. Also, total debt is 12,211% higher in 2022 than in 1946, which certainly should have been reflected in a valuation far greater than the 1.5X accrual effect shown.

A further issue with the data: the values for 2023 are almost exactly the same in 2022, despite debt being 10% greater. This indicates the (lack of) sensitivity in the estimators relative to the amount of cash effectively in circulation. There are one or more of three likely reasons behind these discrepancies:

  1. Relative to government spending, “pass-through” spending from beneficiaries into the economy trails outward.

  2. Market forces prevent an rapid ballooning of prices in immediate order

  3. The rules defining the indicators are subjected to redone, are limited in data collection to account for variances, etc.

Factors 1 and 2 might be considered as being interrelated: if spending is limited by participants despite receipt of benefits, it is relatively difficult to price goods and services upwards instantaneously. However, given that there is ostensibly cash at hand when it comes to spending beneficiaries, a continual rise of costs is inevitable as said cash gradually enters the system despite (for example) a recessive event having subsided.

(Incidentally, this is also the reason why petrodollar contracts ostensibly cushion the “true” effects of profligate dollar creation: when locked up in the central bank vaults of Riyadh, Abu Dhabi, et al, these dollars are effectively “out of sight, out of mind”. When they’re repatriated or “dedollarized”, as is the case in recent times2, the cushioning begins to wear thin.)

Factor 3 is less-frequent but tangibly transformative. This is also why the likes of CPI are inherently unsuitable for observing long-term trends and capturing “true” dollar value. The indicators are supposed to be utilized for course corrections by government planners, whose remedies are persistent, continuous and also delayed in effects taking hold. Unfortunately, a large number of market participants have empirically tended to interpret the CPI “print” running “hot” or “cold” as signals for making investment decisions. For all intents and purposes, however, these indicators have increasingly limited potential for providing accurate signalling.

America’s Personal Debt Problems

In a consumption-driven economy, the simplest estimation might be in terms how much consumers have to spend. This isn’t a simple task: data is released at different times (or delayed/discontinued/redefined). Throughout the course of this century until 2022, it can be seen that Americans’ spending potential is showing signs of severe strain on an annualized basis:

Source: Leverage Shares analysis

By the end of 2022, personal savings has seen a 70% fall from the highs witnessed in 2020 with credit card debt showing a 22% increase over the same period. 2022 ended with the highest amount in credit card debt or this century. Meanwhile credit card delinquency rates witnessed a 43% increase in 2022 relative to the previous year.

While official credit card debt data isn’t out for 2023 yet, the New York Federal Reserve Consumer Credit Panel did note in February that 2023 ended with the highest number of credit card accounts registered in the century so far:

Auto loans, mortgages, and home equity revolving loans, in the meantime, are trending flat or downwards. The panel also notes that credit card delinquencies, in particular, rose rapidly in 2023.

Auto loans and mortgages are also beginning to show rising delinquency while the student debt moratorium effectively flattens otherwise high rates of delinquencies.

Other estimations show some related trends: younger demographics are increasingly tending to shrink away from new car purchases and mortgages while older demographics tend to continue spending on long vacations, property purchases/upgrades, new cars, etc. A lifetime of value accruals advantage the latter; a lifetime of cost increases hobble the former.

For the employed masses as a whole, relief by way of progressive wage increases isn’t readily apparent in the present: recently-released data from the Federal Reserve Bank of Atlanta in fact shows wage growth slowing:

In Conclusion

Through parts of January and during the Q4 earnings season, there were some seeming signs of sector rotation. Given that a volume of economic data relating to 2023 was released throughout February, there is bound to be a number of consequences for market breadth going forward. All in all, market turbulence with a distinct bearish flavor can be expected sooner rather than later.

Professional investors would be hard-pressed to locate resilient market opportunities. On the tactical front, however, there are a number of strategies available as one-click solutions via Exchange-Traded Products (ETPs). Click here for a list of Leverage Shares’ products.


Footnotes:

  1. “The U.S. national debt is rising by $1 trillion about every 100 days”, CNBC, 1 March 2024
  2. “De-dollarisation Is Slowly Changing The World”, Leverage Shares, 12 April 2023

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

Risk Warnings

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

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Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

Leverage Investment

Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.

Cookies

Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

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