Bill Bonner – Bill Bonner’s Diary (United States) –
PORTLAW, IRELAND – In sex, war… and fake-money systems… no one stops to count the costs until it’s too late.
You can quote us on that, Dear Reader.
POTUS will deliver his State of the Union address tonight. After the president’s speech, Stormy Daniels, the porn star with whom The Wall Street Journal claims he had an affair, will appear on the Jimmy Kimmel Live! show.
Our prediction: Neither celebrity will do the math.
Starting next year, federal deficits are expected to reach over $1 trillion a year – with no emergency anywhere in sight.
So far in this century, the feds’ debt has been growing eight times faster than GDP.
Total government debt is already programmed to hit $30 trillion within 10 years… but will more likely hit $40 trillion when deficits explode in the next recession.
Entitlement programs are open-ended. They go up – with no vote in Congress – as people get older.
Meanwhile, the military-industrial-terrorist cronies have such a lock on Congress that they are practically guaranteed increases, no matter how big the bamboozles are.
And the people who might have put the brakes on – old-fashioned fiscal conservatives – have disappeared.
All we have now are cultural conservatives, ready to intervene anywhere, anytime, to remake the world in their own image.
Treasurys in Retreat
We are just observers here at the Diary. We wouldn’t presume to try to change anything… even if we could.
But what we see is a big dot of irresistible force ing straight for another big dot of an immovable object.
Debt has to be serviced. Interest payments must be made. If, as we suspect, we are entering a rising interest rate cycle, the cost of servicing debt is going to rise sharply.
Have you been following the lines, Dear Reader?
Not those goofball lines on page one. No, we’re talking about the important stories buried deeper in the news.
“U.S. Government Bonds Drop Again,” on page 17 of The Wall Street Journal.
“Bond investors sound alarm over rising inflation,” on page 18 of the Financial Times.
“A sliding greenback ought to flash red for Trump,” on page 9 of the Financial Times.
Oh… what’s this?
“Stocks fall most in 2018 as Treasury yields climb,” reported Bloomberg recently.
Treasury prices have been in retreat for a year and a half. And Treasury yields – which move in the opposite direction to prices – have doubled since their lows in July 2016.
Has an epic credit-tightening cycle finally begun?
We won’t know that for a while. But yesterday, the yield on the 10-year Treasury note – an important benchmark for borrowing costs throughout the economy – topped 2.7%.
Hey, Big Spender
Watch the president’s speech tonight. It will give you part of the answer.
Mr. Trump is no old-fashioned conservative. In addition to failing to curb entitlements… increasing transfer payments to the Pentagon… and pushing through a tax bill that increases the deficit by a further $1.5 trillion…
…he’s going to pop another cork.
In short, Donald J. Trump is a big spender… good lookin’… and so refined…
Typically, big spenders – trying to impress – spend money they don’t have on things they don’t need. And, in government, unless the Fed is loosening credit at the same time, this causes bond yields to increase.
This is the “crowding out” effect that the old conservatives worried about back when there still were old conservatives.
The pool of real savings is limited. When the government draws too vigorously from that well, the price of credit goes up.
And now that the feds are trying to borrow more money, they’ll find that their biggest buyer – the Fed – has turned into a seller.
Yes, that little note was buried in the back pages of the newspapers, too:
“Central banks are moving to quantitative tightening,” page 11 of the Financial Times.
And now cometh the Big Spender with more bills to finance – a $1.8 trillion infrastructure project.
Pardon us if we do a little math: At $30 trillion, the annual cost of interest, at a modest interest rate of 5%, would be about $600 billion. At $40 trillion, the debt would cost $800 billion.
And these terrible numbers will come just as medical and retirement expenses rise sharply, too.
But don’t worry about it; bond investors are already on the case. They can count.
And they do.
MARKET INSIGHT: BOND YIELDS SPIKE
By Chris Lowe, Editor at Large, Bonner & Partners
As Bill reports, bonds are in retreat…
Today’s chart tracks the yield on the 10-year Treasury note (which moves in the opposite direction to prices) over the past four years.
As investors sell bonds to buy stocks and other riskier assets, the 10-year yield has broken above the 2.7% mark for the first time since September 2014.
And over the past 18 months, the 10-year yield has nearly doubled.
– Chris Lowe