When the deepest and most liquid treasury market in the world starts bouncing around like my EKG watching Sharon Stone in Basic Instinct, we might have a problem.
Barron’s had a great article by Randall Forsyth talking about a new fiscal regime or what Luke Gromen has called fiscal dominance which is that the debt and in particular the debt to GDP has become too big for our economy. Let me be as cosmopolitan as I can in how to describe this situation. We be fucked. Dick Cheney said in 2002 that “Reagan proved deficits don’t matter.” I hate to be a dick Dick, but you need to understand that the same man doesn’t enter the same stream twice. This was when debt to GDP was 50%. This was before your administration’s Patriot Act kickstarted the financial deluge of dollars that flowed through Obamacare, the birth of QE during the Great Financial Crisis and then through Trump’s $8 trillion disaster of a presidency and now the one-upper Joe Biden who seems to think we have a printing press. Oh wait, that is what everyone thinks now, and they will soon be proven wrong. A printing press prints dollars not money. Our dollar and the future of our dollar have been put in jeopardy by the foolish spending going back to Ronald Reagan’s Star Wars programs.
For years the bond market has been kept artificially low by the Federal Reserve being the buyer of Treasury bonds to finance the government. They are done and I will ask you again, “Who is going to buy the bonds, and at what price?” I am not the only one saying it. On Bloomberg Real Yield, Blake Gwinn, Head of Rates Strategy at RBC Capital Markets said that he was talking to his clients in Canada last week and all of them are wondering who is going to buy the debt. This is a supply/demand story and rates of long term bonds are going higher. US Treasury debt is considered the risk-free rate and it isn’t being viewed that way anymore. It might be safer than most, but there is shutdown and government disfunction risk and there is the $33 T debt and huge projected deficits in the future. This is why Fitch recently downgraded US debt. How is it affecting investors?
We have been watching people tell us that the Fed must pivot for 18 months now, and yet they haven’t so bondholders or those that have been trying to guess when the Fed will pivot have been trying to catch a falling knife. Anyone that has owned TLT, which is the popular long term bond ETF lost 13.7% in the 3rd quarter. Bonds are supposed to be safe, but they are more volatile than stocks and are hemorrhaging money for portfolio managers, pension funds, and insurance companies. Who would have thought that bonds would be riskier than stocks? Remember the age-old line that bonds are the smartest markets in the world? Well, they haven’t been smart, but they are also moving at least which is more than the stock market can say. Treasuries usually lead equities so what do these historic moves tell us about the future direction of the equity market? To be determined
But speaking of determined, the Federal Government managed to kick the can down the road 45 days and avoid another shutdown. Meanwhile the debt clock has already reached $33.150 T. Remember we passed $33T a couple weeks ago and it is accelerating. This is the general dilemma that we find ourselves in: our government isn’t bringing in enough revenue to pay for its obligations. This should be a simple solution right? Raise taxes or stop spending. Anyone can see that. But our politicians are so fucking stupid that they consider either of those options as not even on the table.
When Cheney said that about the deficits not mattering it was under far different conditions. In 2000, we had $5 trillion in debt and about $10T in GDP so with 5% 10 year treasury interest rate we had $250 billion or 2.5% of our GDP in interest expense. I know not all the debt was financed at 5.0% rate but that gives us a ceiling of 2.5%, worst case scenario. Now our debt has gone up over 6x and our GDP has gone up only 2.5X. This is what happens when the government is highly involved in the economy. Now let’s use the same math. Our debt is $33 trillion, and our interest rate is 4.5% on the 10 year bond. We are looking at almost $1.5 trillion in interest expense. That’s 6% of our GDP. Our cumulative interest rate is just under 3% right now so we are almost at $1T, but it is going up every day. Not only that, it gets worse. The deficits are going up so that we will be paying even more interest expense in the future. It gets worse still, as businesses and consumers are forced to pay more interest on their homes, their cars, hell even their cellphones. They will buy less, they will wait to buy and that lowers GDP, it lowers tax receipts so the deficit gets even wider. This is a doom loop people and we be fucked.
The worst part of being a huge conspiracy theorist like I am is when I say that people probably won’t buy $3k Pelotons forever and that the company is not a feasible profitable business due to its never having been a profitable business people look at me funny. They don’t want to hear this because they like the product or something. When I say that industries are disrupting walking or cooking or banking or layaway as we discussed in LBLF last week, I just roll my eyes. The free money has allowed everyone to be an entrepreneur and it is hard. It is easy to get funding, but hard to turn a profit. It is easy to spend on marketing and create revenue- look at Uber. A taxi ride to the airport used to cost $30 but now Uber can do it for $11. Wow that is great but when they want to make a profit and they have to charge $40 for that ride, suddenly old C Thomas is grabbing a cab again. I don’t need chit chat, free bottles of water, or you to rate me 5 stars. I just need a damn ride. Uber has lost what $30 B in its lifetime and had its first profitable quarter ever last quarter when they made $300 million. Uber has relied on cheap financing to grow its business and money has been cheap but it isn’t any more so will Uber make it? It will be hard, making a profit always is. We will see.
Conspiracy theorists like myself are grounded in reality, and it turns out it rains a lot in reality. What most people want are sunshine and rainbows though. They only want to hear positive stuff that makes them feel good. Sorry Sunshine, this isn’t how life works over the history of time. Only in this little sliver of time in America where work isn’t necessary and free credit allows Americans to live a life that was formally the domain of the rich. Why are airline flights to Europe so cheap? The government bailed out the airlines. Why are cars so cheap? The government bailed out the automakers. Why is it easy to get a credit card or a new loan, because the government bailed out the banks. What happened to the unsecured depositors at Silicon Valley Bank in March? Did they lose all their money that was over $250k, no, the government bailed them out. Those bailouts and much more are sitting in that heaping pile of $33T in excrement. Do you like living in a house? Fannie Mae and Freddie Mac got bailed out too. Can you imagine how difficult it would be to get a loan if the bank had to sit on that loan for 30 years instead of packaging it up into an MBS and selling it? Thank the Feds. Pensions- bailouts. Hurricanes-FEMA. Covid- helicopter money. It is all there along with every other piece of pork that congressman have added to make their lobbyists happy. It is the end of the American standard of living and it is growing fast and when it reaches a certain size, life as we know it will forever be altered. I just don’t know what size that will be, but when the deepest and most liquid treasury market in the world starts bouncing around like my EKG watching Sharon Stone in Basic Instinct, we might have a problem.
American treasuries broke out to new yields that haven’t been seen in 16 years, when our debt was single trillion digits. Just saying single digit trillions makes my skin crawl. Yet, they still didn’t even talk about lowering the deficit or having a plan to reduce spending. The European bonds were up 18 basis points and then they were down 14 basis points this week in back to back days. Remember poor Liz Truss? She wanted to raise her countries’ debt and the bond market pushed back against her and out the door she went. Goldman Sachs Put out an article this week discussing the bond markets struggle with growing government debt. In it, Goldman Sachs Head of European Rates Strategy George Cole says, “If you add to that central banks no longer running this easy policy, we find that there are now consequences for running high debt-to-GDP ratios, which is that your interest costs will increase, and if your growth rates and inflation rates don’t keep pace over time, then there is a question mark about who will buy these bonds.” He specifically mentions the UK Gilt crisis. He said “there were several idiosyncrasies at play in the UK market … ultimately investor alarm was fuelled by fiscal concerns, inflation, and the amount of bond supply that appeared headed for the market.” Doesn’t that sound like America in the last two months since Janet Yellen we are going to have to issue a whole lot more long-term bonds than we were expecting. The only thing that has happened is Nvidia has sold off 20%, Apple 10%, the general market 7%, meanwhile long term bons are going through the roof.
There was another important article by Spencer Jakab about the bond vigilantes of the 1990s this week in the Wall Street Journal. He quotes James Carville, the little bald headed Cajun that worked as an advisor for the Clinton Administration, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” He was exactly right and the bond market intimidated the Clinton administration into balancing the budget and even running a surplus. Jakab makes the key point of the article though, the debt is too high now. Congress will never produce legislation that would allow it. Why you ask, Jakab writes “This time, though, the vigilantes won’t get far in Congress. Of $6.4 trillion in projected federal outlays in fiscal 2024, only $1.85 trillion is neither mandatory nor net interest. Of that, about half is defense—a vexing category to trim, even in peacetime. Making draconian cuts to what is left would cause a public outcry and still wouldn’t be enough.”
Jakab goes on to offer a couple possible scenarios, like inflating it away, repressing the interest rate through yield curve control, or austerity measures designed to slow spending. He calls of them unlikely. He omitted one key and very vital option. America. America could wake up, wise up, and throw all of these Congressmen and women the hell out of office and start with people that haven’t been bought and paid for as Vivek Ramaswamy says and actually start cutting government and lowering the federal outlays. Raising the age for eligibility for Social Security and Medicare, creating more means testing for both, stop playing world policeman and bring our troops home, and for god’s sake don’t send another dollar to that little troll Zelensky in Ukraine. We should also try keeping our promises to the foreign governments abroad and maybe we could gain credibility on the global stage. This Americans can do, but they won’t because they just aren’t paying attention. They are watching the circuses designed to distract us while the wolves in government rob our henhouse called the United States of America.
Sincerely Yours,
C Thomas Printer
On this date in history…34 years ago to be exact, continuing our recent racehorse theme, American racehorse Secretariat died after contracting laminitis. Big Red, as he was known, still holds every racetrack record in the three triple crown races.
This week’s thought experiment…how did America get in such a fragile place financially. How does the government affect you…
Also born on this date…the man that restored the public faith in the presidency after years of corruption, Rutherford B. Hays. It can be done again.