ELECTION YEAR “GIMMICKS” ABOUT TO UNFOLD

OBSERVATIONS: Yellen’s Treasury “Gimmicks” Are Coming!

It likely comes as no surprise to you that the U.S. federal government has borrowed so much money over the past year that it has had to spend one-fifth of all the money it collected just on debt interest—which came to almost $880 billion. Americans paid some $450 billion less in income taxes for the year, trapping the government in the pincers of a fiscal crunch.

Debt cost has skyrocketed by more than 50 percent between 2019 and 2023. Government debt stood above $33 trillion in fiscal year 2023, (the 12 months that ended on Sept. 30). That’s about $1.7 trillion more than the year before. Over the past year, it has already surpassed the entire military budget. The problem is only getting worse, as old debt issued at low interest rates matures is rolled over into higher rates.

The real problem however is the government for some inescapable reason is incapable of resisting spending at even further increasing levels?

The 2024 debt is already $33.7 since YE September and will be $34T within the 100 days when congress enacts the next Continuation Resolution (CR) when it returns in January. Annual interest expense is now on its way to $1.25T and we can expect the 2024 deficit to be $1.6-$2.0T by March 1st. In the 9 months from when congress enacts the next CR until fiscal YE we can fully expect the fiscal deficits to approach $4T. This is the level of fiscal insanity that is in control of Washington. There is no return when a country’s national debt is larger than its GDP without debasing the purchasing value of your currency.

The only solution is Congress must immediately and dramatically curb deficit spending to instill confidence in investors who are steadily losing faith (along with Fitch downgrades in June and Moody’s in October) in America’s ability to satisfy its obligations. Increasingly weak US Treasury auctions are now signaling and evoking further global institutional unrest and hesitancy in buying US debt.

Instead Yellen and other political operatives are huddled in the White House working on election year spin and deflection narratives to hide this crisis. We should expect the following political gimmicks to soon emerge:

Gimmick #1: While the government pays some of the interest to itself, as it holds about 20 percent of the debt in various trusts and funds, interest from that portion of the debt is supposed to pay for future expenses of programs such as Medicare and Social Security. That money is already slated to go out the door. It just hasn’t gone out the door yet. It’s not as if the government has that cash on hand to spend?

Gimmick #2: Issue a $1T Bitcoin is being trial ballooned around the White House planning tables.

Gimmick #3: The easiest “Slight-of-Hand’ will be to push the narrative that servicing the debt isn’t much of a worry, since the Fed can print the cash necessary to cover the interest or even buy up the debt. The Treasury would then pay the interest on the debt to the Fed, which would then use the money to cover the cost of its operations and send the surplus back to the Treasury. The government would, in effect, pay the interest to itself.

This is the easiest with a compliant media always ready to assist in deflection and a public too poorly educated to understand that about 20 percent of the government debt is held by the Fed already (result of QT). Therefore the reality doesn’t necessarily follow this logic, because they actually now lose money. The reason is that so much of the Treasuries they have on the books was purchased in 2020 and even early 2021 when rates were near zero, so those assets are earning almost nothing. Anything the Fed does collect on its portfolio, it immediately pays out to banks and money market funds in interest on reserves and reverse repurchase agreements. The point of those operations is to stem inflation— keeping liquid cash locked in its vaults so that it can’t multiply in the banking system. These operations now cost the central bank some $700 million per day, forcing it into a “huge deficit”. It’s not sending Treasury a dime.

All these factors seem to be souring investor confidence in the bonds. And once spoiled, investor trust is hard to restore.

WHAT YOU NEED TO KNOW!

THE “CLEANEST DIRTY SHIRT” IN THE LAUNDRY?

The US Stock Market has just experienced one of the strongest rallies in the shortest period of time in history. The chart to the right suggests it may be because the US is currently the best place to “park” global risk money. However, with the US economy spending in excess of its budget by $1.7T, this is resulting in the “I” (for Investment for foreign buying of US T-Bills), the “G” (Government spending and Transfer Payments) and the “C” (Consumption from depleted savings, credit card balances and borrowing against 401Ks). This leads to ONLY a temporary surge in GDP (GDP = C+G+I+ (Exp-Imp)). The operative word here is “temporary”, unless US debt growth accelerates at an even faster pace. Normally, this is not sustainable?

RESEARCH

THE MARKET CONSENSUS IS ALMOST ALWAYS WRONG!

• • Not so surprisingly is that the contrarian moves from the Fund Managers Survey (FMS) are significantly inline with MATASII.com independent research.

FIVE ECONOMIC INDICATORS TO BE THANKFUL THIS HOLIDAY SEASON

• • The Unemployment Rate is Below 4%
  • Low unemployment claims
  • Inflation is Decreasing
  • Mortgage Delinquency Rate Near the Lowest Level since at least 1979
  • Household Debt burdens at Low Levels

GLOBAL ECONOMIC REPORTING: What This Week’s Key Global Economic Reports Tell Us?

• LEADING ECONOMIC INDICATOR (LEI): The Leading Economic Index (LEI) was down again in October. For more than a year and a half this bellwether has signaled a recession that has yet to arrive. We look at prior cycles to consider to what extent the severity of decline in LEI is indicative of the magnitude of recession.
• NATIONAL ACTIVITY INDEX (Chicago Fed): The Chicago Fed National Activity Index (CFNAI) tumbled to -0.49,(below 0 meaning below-trend growth), well below expectations of 0.0 and September’s -0.02 print.
• CONTINUING JOBLESS CLAIMS: Jobless claims surged on an un-adjusted basis to four month highs.
• DURABLE GOODS: October Durable Goods declined more than expected to -5.4% (exp. -3.1%, prev. 4%). 

DEVELOPMENTS TO WATCH

Q3 EARNING CALLS: KEY CEO FOCUS

• • INTEREST EXPENSE: Managements discussed increases in interest expense in a higher rate environment.
  • DEBT PAYDOWN: Debt paydown and Leverage Ratios were a priority relative to other capital spending alternatives.
  • CONSUMER SPENDING: Firms shared their perspectives on the health of the consumer, where opinions are split down the middle.
  • ADOPTION OF AI: Firms have continued to highlight the uses of AI in their business to boost productivity and enhance product offerings.

Q4 EARNINGS: ANOTHER YE “HOCKEY STICK” DISAPPOINTMENT

• • Analysts are often wrong with annual earnings by a large degree – Often right up to YE before they have to finally acknowledge they were wrong all along.
  • Q3 Earnings Season is over. How did you do? Just wait until you seek Q4. Are you tired of being suckered?

Better luck with 2024!