Everything is fine

“We face a possible dollar inflation uncertainty nightmare,” writes the economist Charles W. Calomiris, in—of all places—a quarterly journal of the Federal Reserve System. The worst imaginable consequences of the subordination of monetary management to the public debt is the subject before the house.

“Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements” is the unsensational headline over the essay in which Calomiris advances his pulse-pounding conclusions. In it, the Henry Kaufman Professor of Financial Institutions Emeritus at the Columbia Business School speculates about a looming fiscal crisis, a buyers’ strike against Treasury securities and the monetary-policy response to this imagined catastrophe. Suffice it to say that it isn’t bullish.

“Many readers, not remembering the failed Treasury-bond auction of Aug. 1, 1973, will doubt that a creditors’ strike is even conceivable. However, there’s no quarrelling with the proposition that the Treasury is borrowing trouble. Calomiris chooses to preface his article with an excerpt from the Feb. 16 Financial Report of the United States Government, which reads:

“Under current policy and based on this report’s assumptions, [government debt relative to GDP] is projected to reach 566% by 2097. The projected continuous rise of the debt-to-GDP ratio indicates that current policy is unsustainable.”

• ‘Grant’s Interest Rate Observer’, 27 October 2023.

“It perplexes me that people continue to conduct their personal and financial planning as though the world isn’t on the cusp of dramatic change. While I hope for a return to normalcy, the setup for sweeping changes and volatile shifts seems as palpable as it has ever been in my investing career:

• U.S. monetary policy is as broken as it has ever been, swinging wildly from near negative rates and unlimited quantitative easing for nearly 20 years to raising rates at the fastest clip in recent history.
• Fiscal policy has done nothing to address the nation’s debt load, which is resulting in unheard of debt service obligations. In fact, our deficits appear to be accelerating as the U.S. spends wildly.
• The U.S. has effectively lowered its backup oil supply in the strategic petroleum reserve to the lowest levels in decades, increasing the risk of an oil shortage or rising prices, while encouraging military conflict with both Russia and Iran, who represent two of the world’s largest oil exporters. At the same time, the U.S. has put a lid on oil production domestically and has discouraged drilling.
• The U.S. is now lending military aid to both Ukraine and Israel in conflicts that both have legitimate chances of spreading to other parts of the world — aid that is paid for with defense spending with cash we don’t have and need to borrow from the Chinese.
• The U.S. economy, housing market, commercial real estate market and stock market all remain in bubble territory, near historic highs, and have yet to make any part of a meaningful drawdown that I believe is a mathematical necessity based on where interest rates are.
• Political division in the U.S. remains at a fever pitch with an upcoming election fast approaching. Questions about election legitimacy and the bifurcation of both major political parties in the country are foreground issues that can exacerbate all of the above and — most importantly — keep our nation in a precarious state, not just financially, but morale-wise.
• ‘The Stock Market Sits On The Edge Of The End Of The World’, Quoth the Raven, 12 October 2023.

Total US debt now stands at $33.6 trillion. But this is fine.

83% of US tax revenue in the last fiscal year was spent solely on social security, Medicare, the military, and interest on the national debt. But this is fine.

In mid-2020, the yield on the 10 year US Treasury bond – essentially, the global benchmark ‘risk-free rate’ – was at approximately 0.5%. It now stands at 5%. A surge higher of such magnitude in such a short period of time has probably never happened before. But this is fine.

For the six months to August, China, the second-largest foreign creditor to the United States, sold more than $45 billion of its Treasury holdings, according to official data. But this is fine.

Meanwhile the US Federal Reserve, which owns a large amount of U.S. government debt that it has bought to support bond markets during periods of financial volatility, has begun to shrink the size of its balance sheet, reducing demand for US Treasuries just as the government needs to borrow even more. But this is fine.

Money supply growth in the US, on a monthly basis, is negative for the first time since the 1950s; on an annual basis, it is negative for the first time since the Great Depression. But this is fine.

Three of the four largest bank failures in US history took place during the early summer. More than $500 bn has had to be written off since March. But this is fine.

When Alan Greenspan was Chairman of the Federal Reserve in 2001, he enjoyed a Gallup confidence level of 74%. Jerome Powell currently enjoys a confidence level of 36%. But this is fine.

Everything is fine.

..but just in case everything isn’t fine, now would be a good time to reassess what you own in your investment portfolio, and why you own it.

………….

As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:

Get your Free
financial review

Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.

Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.