On Monday we, in some ways, begin the year. As the Presidential inauguration takes place, we already know this will be an "interesting" 12-48 months ahead
From a Financial markets' perspective, it will not be dull but likely it will also be volatile especially on any given day. Managing day to day headline risk will be needed while also trying to pursue some core views. Risk management is going to be key.
One of the interesting headlines on Friday from the CBO was that "The US is set to exceed World War II debt levels by 2029". That headline might be true, or it might be fake news-but it strikes a chord.
One thing we can say for sure is - "It's The Bond Market, Stupid"
Everything is going to get driven by where the bond market goes and why it goes there.
At the moment (Despite Fed board member Waller's conversion to Uber dove this week -Or maybe Chair in waiting) there is NO justifiable reason for the Fed to cut again.
Everything coming through the pipeline argues for higher yields.
Right now, the Fed is not prepared to even talk about the idea of hiking (Shake the dust off that transitory bandwagon again).
The reality is that in the last 30+ years where we have seen the Fed start an easing cycle and then pause in 60% of the times the next move has actually been to raise rates.
However, we are likely to get headlines in both directions and a "hyper-reactive" market- as we saw last week on the combination of the Waller comments and one CPI number followed by stronger than expected data today.
Until something breaks-and that just has not happened yet, we are likely to see yields push higher. Eventually the move higher in yields and possibly Commodities (Oil, Copper, Industrial metals and Gold are all bid right now) may well break things and historically that has been the case.
But for now, and likely Q1 the driving force is deficit spending (now at elevated interest rates).
One of the fallacies of life is that debt of 100% of GDP is a magic number. There is a huge difference to see debt at 100% of GDP (or over 120% now in the case of the US) and interest rates at zero and see it with interest rates close to 5%, a $1 trillion a year interest bill that rivals defense spending and the debt still growing.
When interest rates in the 1970's into 1980 eventually went to 20% courtesy of Paul Volcker we had a National Debt that stood (1980) at 26% of GDP
The continuation on the present path is unsustainable unless rates were to drop dramatically, or the economy was to go "gangbusters" and grow such that the debt to GDP fell substantially.
Of course, that is unlikely unless the nominal value of the economy was to grow very strongly. In that instance that would almost certainly keep inflation sticky and need the Fed to "look through" the fact that the 2% inflation target was "out the door" Not good for the bond market.
In 2019 the size of the US economy was about $21.4 trillion, and the national debt was $22.7 trillion
In 2024 the size of the US economy was about $29 trillion, and the national debt was around $36 trillion
So, in 5 years the economy grew by about $7.6 trillion and the national debt by $13.3 trillion.
I think that when Scott Bessent this week said that we did not have a revenue problem we had a spending problem it is clear that he was sugar coating it.
We have a "sugar rush" spending disaster.
No economic pain seems acceptable anymore and there seems no cause that we will not make "untouchable" in this regard.
This is a ticking timebomb
As Winston Churchill was famously reported to have said. "Americans can always be trusted to do the right thing, once all other possibilities have been exhausted.”
The trouble is that as, yet nothing has seriously broken and not enough people in power have reached a point in believing that it is time to do the right thing and suffer the pain today to make the backdrop better tomorrow (for our kids and grandkids).
Paul Volcker (rest his soul) believed and practised that, but people of that conviction are sorely lacking today.
It is hard therefore not to believe that we will just keep filling the punch bowl (in good times and bad) until that moment comes when everybody realises they need to sober up.
Until then the only adult in the room that seems to be starting to deliver the message is the bond market and if we continue to move higher in yields this year and things start to break then maybe, just maybe. the lights start to go on. and we will awaken the sleeping giant.
