In threes: fiscal policy needs fixing
In threes: fiscal policy needs fixing
In the 1988 film, Beetlejuice, which was recently re-made, the spirits of a deceased couple live in what used to be their home with a family very different to them, and hire a malicious spirit, Beetlejuice, to drive them out. To summon him, his name must be said 3 times—and the couple eventually regrets luring him.
As I came across many characters from this film on Halloween, the movie has been on my mind. Particularly as I watch Treasury interest rates rise in the post election market run (+8 to +16bps). I thought, is there a similar criteria to summon bond vigilantes?
Looking through data, there might be: get to 3% of GDP in Federal interest payments. Oh and we will by year end.
So I think the single biggest financial issue for this presidency will be the deficit. The bond vigilantes have been summoned, in my opinion, and they are staying.
Why? Our deficit is at $1.8 trillion. About half of government spending goes to Social Security, Medicare and Medicaid. In addition, about $1 trillion, and rising, now goes to interest payments. The last time interest payments were that much was in the 80s and 90s when rates were practically double digits.
A related point of concern is the discussion around tariffs filling the gap. A quick review of the Congressional Monthly Budget Update showed that may not fix it. Tariffs put in place by Trump during his first term made $80b in 2023.
Yesterday’s move in the US Dollar — a 1.7% increase post election—was really big for a developed market currency move. While it aligns with a rise in interest rates, it’s strange to see small caps ripping along with them. This is because small caps have, on average, 19% greater leverage, as measured by debt to assets, so higher interest rates are usually not a positive for this subset of stocks. However, they do have more in the financial sector, which can benefit from a greater difference between short term and long term rates.
While yesterday’s market moves are bullish, there are still big issues to contend with, like in the aforementioned film, the regret of past choices on fiscal policy for many years may show up.