Infrastructure Week!

Roy Lichtenstein (1961) There’s a great Sherlock Holmes story called “Silver Blaz

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  1. As a long-time deficit scold - now cowed - I’ve learned this about deficits: they don’t matter until they do.

    The trigger / the catalyst / the tripwire / the moment seems unknowable in advance (at least in advanced countries). Pick a putative trigger - some percent of GDP, some ratio, something - and Japan shows it can be blown through without any consequences.

    QE, monetization, what have you - it works until it doesn’t, but if we have no guide as to when “it doesn’t” is, then it’s probably a three-body problem.

    Can we have an inflationary world - sure, but Japan has taken deficits to unfathomable heights while doing everything it can to generate inflation with almost no success.

    So, I close where I opened, I’ve learned this about deficits: they don’t matter until they do.

  2. A bearish steepener for the bond market, that’s what happens first. Haven’t seen that for many, many years.
    Will bonds be once again called “certificates of confiscation” as they were when I first entered the investment world?
    Maybe, but not until we see many years of a bond bear market.
    Anyway, clear drag on equities but only on a secondary basis.

  3. Ben, this echoes my own thinking as much as anything you have written. I was thinking the exact same thing as I watched the election postmortems. In all the analysis, the discussions of the issues that people cared about and the charts and graphs showing the relative importance of those issues----deficits and debts were nonexistent. Somehow a ragtag band of refugees wandering through Mexico was more important than a trillion dollar deficit.

    My father served in the Maryland state senate for 24 years and was involved in the efforts in the 80’s and 90’s to get a balanced budget amendment added to the US Constitution. His main emphasis was to get two thirds of the state legislatures to petition for a constitutional convention for the purpose of writing an amendment to the Constitution to mandate a balanced budget. They fell a few states short of two thirds and then the balanced budgets in Clinton’s final years put an end to the amendment movement.

    I’m not arguing that amending the Constitution is or isn’t the answer. What I am saying is that what was once a major issue 25 years ago is totally removed from the political and public discourse today. It amazes me that hardly anyone thinks it odd that an economy running at full speed could result in a federal deficit approaching a trillion dollars. But the day is coming when the dog will bark.

  4. it’s not a bear steepener. That implies bond holders would be shortening duration rather than outright selling if inflation expectations were to accelerate. Also would imply the FOMC (or ECB) would sit on their hands rather that move to subdue inflation with higher front end rates. Questions on central bank independence as we see in EM from time to time would indeed be the steepener trade.

    The story here diverges from Japan when you see employment, consumer spending, and credit all growing smartly and gov’t spending throwing fuel on the fire (C+I+G). Demographics and a lack of attractive domestic investment opportunities have scuttled that factor convergence in Japan, despite a spectacular degree of “G”. Tough to see what the right implications of this theme is for the bond market, other than to remain short relative to equities and commodities.

  5. I would expect “Austerity” to get the same reception in the US as it has in EC countries where preached. Benefits once received are very difficult to suspend. Therefore, after some longer period of time than we expect, the flash point will come.

    Besides looking for companies with sufficient “moats” (to ensure demand, at least), I am accepting that some or much of the recent paper wealth increase will be given back in the reset. Hopefully not, but maybe so. (Back to you, Ben.)

  6. Avatar for cazo97 cazo97 says:

    CNBC right on que - 11/12/18: “Rebuilding America”

  7. Well, maybe today’s WSJ article about interest/debt service as a percent of budget, revenue, and GDP will be among the voices to change the narrative. Tho not the boy who sees an naked emperor, just maybe heading in that direction.

    Haul-ass, bypass, and re-gas!

  8. Long bonds would be under the greatest threat in the environment Ben is describing.
    Both lose ( hence bear steepener ) but 30 year bonds at greatest risk from out of control deficits and inflation.
    Fed has no appetite for all out , damn the torpedo, inflation fighting.
    That requires support from the populace, like Volcker had when people wanted, needed relief from the raging inflation of the late 1970s.
    They will lag what is really needed until the people demand it. Long bonds will hate that.

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