Financial Advantage Services, Inc

Financial Advantage Services, Inc Full-service office for financial and insurance services. Securities are offered through Peak Brokerage Services, LLC, Member FINRA/SIPC.

We specialize in: Mutual Funds, Fixed Annuities, Fixed Index Annuities & Variable Annuities, along with all types of Life Insurance Financial Advantage Services, Inc is a separate and independent entity from Peak Brokerage Services, LLC.

10/13/2025

Underneath the Noise, Budget Deficit Progress!

Date: 10/13/2025

Over the past two and one-half decades, the federal government has buried taxpayers under a mountain of debt, now approaching $38 trillion.

During this time, the key problem has been spending, not a lack of tax revenue. Over the past 25 years, taxes have remained relatively stable as a share of GDP, while spending continued to rise. We estimate that spending was 23.2% of GDP in the year ending September 30 (Fiscal Year 2025) versus 17.7% in 2000. In other words, the reason we have a debt problem is because we have a spending problem.

That’s the bad news, and it means policymakers still have a very long way to go before we can claim our fiscal house is in order. But just because the overall budget picture remains bleak doesn’t mean we shouldn’t recognize improvements when they happen, and there is some progress.

The Congressional Budget Office recently estimated that the budget deficit for the year that ended on September 30 (FY 2025) came in at $1.809 trillion, slightly smaller than the $1.817 trillion of FY 2024. Although that’s only an improvement of $8 billion in dollar terms, there are reasons for at least some modest hope on the deficit.

First, we project that nominal GDP grew 4.8% in FY 2025, which means that even if the deficit remained roughly the same in dollar terms, it declined relative to GDP. After clocking in at 6.3% of GDP in FY 2024, it looks like it was 6.0% in FY 2025. That may seem like only a minor improvement, just 0.3 percentage points of GDP, but it’s a shift from the expansion of the deficit in the prior two years. It’s movement in the right direction.

Second, the decline in the deficit this past year would have been larger were it not for a calendar-related issue. In particular, two years ago (in 2023), October 1st fell on a Sunday, and so $72 billion in federal payments (spending) that normally would have been made that day were instead made on Friday, September 29, 2023. That shift changed the budget math because September 29 was still in FY 2023. This artificially held down official spending in FY 202,4, making the deficit appear smaller than it really was. In addition, due to natural disasters in 2023, some taxpayers were allowed to postpone tax payments. This boosted revenue in FY 2024 by about $70 billion. In other words, the actual reduction in the deficit for FY 2025 was really closer to $150 billion, not $8 billion.

Third, although total federal spending was up $228 billion last year (after adjusting for the timing issue discussed above), the gain was due to factors largely outside the control of the new President and Congress, at least in the short term. Spending on Social Security, Medicare, and Medicaid was up a combined $245 billion in FY 2025. Meanwhile, interest payments on the national debt were up $80 billion. In addition, the Environmental Protection Agency, under the direction of the former President, shoveled out $20 billion in extra payments in the waning days of his Administration, which was included in FY 2025. By contrast, other categories of spending – outside those entitlements, interest, and unusual EPA payments – declined $117 billion. When is the last time you remember that happening?

Fourth, due to weather-related disasters, some revenue that normally would have occurred in FY 2025 is being postponed into FY 2026. In other words, while the CBO says federal receipts were up 6% versus last year, the gain would have been more like 8% in the absence of disaster-related deadline changes.

Again, none of this means we are anywhere close to having the debt or deficit situation under control. A deficit of 6.0% of GDP is still unsustainable. Moreover, the Supreme Court may throw the whole budget situation for a loop if it declares recent tariffs illegal. Expect a ruling early next year.

The current shutdown and political brawl over emergency additions to Medicaid spending during COVID is extremely important for maintaining this progress. Government spending had been on a one-way escalator, with each so-called crisis (2008 and then COVID) permanently lifting spending to a larger and larger share of GDP.

Somehow, the angst over budget deficits has disappeared. We remember when deficits were all anyone talked about. Remember ABC’s Sam Donaldson screaming at President Reagan about the size of the deficit?

Lately, the angst and screaming has been about cutting spending, not reducing the deficit. The good news is that progress is being made. And it’s important to recognize that budget progress when it happens, even if more needs to be done. So, here’s a thumbs up for the progress that has been made in FY 2025, with fingers crossed that this progress is just the beginning.

09/22/2025

Monday Morning Outlook

Monetary Musings

Date: 9/22/2025

The stock market surged to new highs after the Federal Reserve cut the federal funds rate last week and the futures market has priced in more cuts to come. However, these cuts have not helped reduce long-term interest rates and the price of gold has surged to over $3,700 an ounce.

Clearly, many investors are concerned rate cuts are unwarranted. After all, the Consumer Price Index is up 2.9% in the past twelve months, which is higher than it was a year ago. We won’t get August PCE inflation – the Fed’s preferred measure – until Friday, but it looks like these prices are up 2.8% versus a year ago compared to 2.3% in the year ending in August 2024.

Either way, it looks like we are further from the Fed’s 2.0% target for inflation than we were a year ago, so isn’t cutting rates playing with the inflation fire?

We think inflation is always and everywhere a monetary phenomenon, just like Milton Friedman explained many decades ago. Some economists, including those at the Fed, think the money supply is no longer useful. But, without the money supply, they still don’t have a good explanation for why inflation surged to 9.1% by 2022, the highest since the early 1980s.

After all, the Fed held short-term interest rates near zero for seven years (2008 – 2015) in the aftermath of the Great Recession and inflation remained under control. During COVID, it only held rates at zero for two years. If seven years of zero didn’t cause inflation, how did two? The only solid explanation is the money supply, which remained contained after 2008 because of more stringent capital and liquidity rules on banks. During COVID the Fed loosened those rules, facilitating an unprecedented 40% surge in the M2 measure of money over a two-year period. That’s why we had an inflation surge.

Yes, we understand COVID lockdowns and deficit spending were highly unusual. We also understand that the lags between shifts in the money supply and subsequent inflation can be long and variable. But it’s hard to see how the M2 surge from 2020-22 would still be having a major effect today.

Inflation is much lower than its peak and that aligns with much slower money growth in recent years. M2 contracted (which is highly unusual) in 2022-23 and since then is up at an average annualized rate of only 3.9% and up only 1.7% versus the 2023 peak. For comparison, M2 grew about 6% per year in the decade prior to COVID with much lower inflation.

Yes, tariffs raise the prices of some items, but if the money supply doesn’t change, prices for other things must fall. For example, home prices have flattened in recent months and rents for new tenants declined 8.4% in the second quarter this year, the steepest drop on record for any quarter going back to 2005. In time, this will have an impact on the government’s measure of rent, which will help put downward pressure on inflation measures, as well. In other words, the Fed may be cutting rates, but it’s the money supply that matters.

More importantly, after years of holding rates below inflation, interest rates are now above inflation. In other words, the Fed is not unwarranted in cutting rates. The rate cuts priced into the market still leave the “real” federal funds rate in positive territory. They are not just because of political pressure.

Are we concerned about Fed independence? Yes, monetary policy should not be controlled by politicians. But the Fed has only itself to blame. It did not act independently during 2008 or COVID when quantitative easing and zero percent rates provided the fuel for an unprecedented surge in government deficit spending. The inflation that followed (what we call political kryptonite) forced the Fed and politicians to accept higher interest rates and quantitative tightening. Politicians and the Fed may want to keep money easy, but markets have the final say.

To summarize, don’t just watch interest rates. Watch the money supply too. For now, we think some modest cuts in short-term rates are warranted. But a surge in the M2 measure of money, if it happens, would change our minds. The Fed often claims to be “data dependent.” In a better world, the money supply would be a major part of the data they are dependent on.

08/18/2025

Monday Morning Outlook
Departures From Free-Markets Aren't New

Date: 8/18/2025

Recently, due to deals President Trump is making, some are saying the United States has embarked on a version of Chinese-style “state capitalism” – directly entangling markets and government. No one is claiming that the US is as involved as the Communist Party dictatorship in China or authoritarian Russia, but certainly more entangled than a normal US free market approach would permit.

There are plenty of examples to go around, like the Trump Administration putting pressure on Intel to replace its CEO, wanting Goldman Sachs to fire an economist, demanding 15% of revenue from AI chip sales to China, creating a government-owned Golden Share in Nippon Steel’s purchase of US Steel, and pursuing pledges of hundreds of billions of investment from our trading partners to buy-down tariff rates.

On top of all this, the US is developing a system of tariffs that relies on the discretion of the president (and his team), varying from country to country, and in many cases, product to product.

On the surface, the argument that the US is moving toward “state-run capitalism” appears to have considerable evidence in its favor. What the argument ignores is that this started long ago.

Starting back in the 1930s, the government paid farmers either not to farm or to farm certain crops. In the 1970s, the US instituted price controls and differentiated between industries and even individual companies within industries. The US also capped oil prices, restricted branching by Savings and Loans and would not let banks pay interest on checking accounts.

For decades, by backing Government Sponsored Enterprises (GSEs), like Fannie Mae and Freddie Mac, government held mortgage rates artificially low which distorted the housing market. This bid up the price people were/are willing to pay for the existing stock of homes, while many state and local governments make it difficult to build new housing. The same thing goes for the takeover of student loans by the federal government and the push to forgive those loans. Anyone who thinks state capitalism is new doesn’t know history.

There are plenty of other long-standing interferences in the market in addition to these, like ethanol subsidies and gas mileage requirements (which, contrary to the narrative about Trump were recently watered down by the Big Beautiful Bill). The Biden Administration allocated green energy subsidies to favored firms under the Inflation Reduction Act, the CHIPS Act favored semiconductor production in the US, and the Nippon-US Steel takeover was originally blocked for political reasons. Environmentalists forced manufacturers to change lightbulbs, stoves, dishwashers, toilets, washing machines, and dryers.

So, forgive us if we yawn at the current gnashing of teeth over this issue in 2025. Are we supportive of it? No. But is it new? Absolutely not. We’ll breathe our last breathes standing up for free markets against political meddling. We are dismayed that Republicans, who are historically associated with supporting free markets, are willing to support this, instead. No wonder younger Americans who don’t know economic history well are often supportive of communism and socialism.

And while we fully understand this interference in markets began long ago, it accelerated in a huge way during the Financial Panic of 2008-09, when President George W. Bush bizarrely announced that he had to violate free market principles in order to save free markets.

Back in 2008, mark-to-market accounting procedures turned a manageable loss of housing value into a once-in-a-century financial panic. But instead of adjusting those accounting practices, policymakers set up TARP to bailout Big Banks, designed an auto bankruptcy that bailed out Big Labor, and launched multiple rounds of Quantitative Easing.

No wonder many people who might otherwise vote to support free markets became more receptive to the idea that the economic system was “rigged” in favor of certain groups. And, in turn, if politicians are going to rig the economic system in favor of those groups, why not their preferred special interests, as well?

The bottom line is that it would take a major change in political attitudes to undo the massive harm inflicted by the policy reaction to the 2008-09 crisis. We are hopeful this change in attitude arrives eventually, but don’t expect it anytime soon. The current leadership expects a surge in potential long-term economic growth from its policies, but the more the government entangles itself in the market, the less likely that is to happen.

08/05/2025

New way to be stupid with your money, BNPL.

Buy Now, Pay Later (BNPL) has surged in popularity over the past six years, with the dollar value of BNPL loans in the U.S. growing from $2 billion in 2019 to $116 billion (and rising) by 2025. It's now commonplace in online shopping to see companies like Affirm offering “four easy payments” to help you purchase the item of your dreams. Most BNPL providers use a pay-in-four model, and a significant portion of their revenue comes from interest on longer-term loans.

The biggest users of BNPL are the 18–29 age group (Gen Z)—and they’re also the most likely to be late with payments. Saving up for that awesome item over time takes a lot of willpower, a concept known as delayed gratification. Physical cash adds a psychological layer to spending in which you're often more careful with money when it's in your hand, compared to swiping a card. That said, BNPL adds another layer of risk to online shopping due to the ease and constant temptation of impulse buying.

Interesting rabbit hole I fell into after reading this WSJ article, The BNPL's as we know them really took off in 2010's.

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