President Trump Is Not Your Father’s Conservative

Nobody cares about debt and deficits anymore.  Until they will.

Excuse our little diversion as we set the mood music and narrative for our analysis of the current U.S. budget situation.

Sovereign Borrowers Have Found A New Revenue Source?

The total stock of negative-yielding debt now tops $12.5 trillion dollars, including benchmark sovereign bonds in Germany and France.  If this pace continues, some of these government borrowers — can’t even rule out the U.S. G — are going to be convinced they have found a new revenue source to finance profligacy.  Generate more revenue by running bigger budget deficits to accelerate the expansion of negative-yielding debt.

The new zoom loop. It’s a no-brainer, right?

Reading More Kafka

That’s why we read more Kafka these days, folks.  His writings keep us open and flexible to the fact that just when we think peak absurdity has been reached in the bizarro world and bizarro times in which now live, there is another bizarro dimension out there to write the next chapter.

Asset Markets Have A Napolean Complex: A World Of Shortages 

Seriously, the world’s not that hard to figure out.   The metanarrative is that we now live in a world with some serious shortages going on in certain major asset classes.

We have posted several pieces on this new supply-side economics.

When prices are rising and quantity/volume declining, always suspect a negative supply shock.

Risk-Free And Stocks

The global central banks have generated a huge shortage of so-called “risk-free” assets with their massive asset purchases, repressing and officially depressing interest rates.  Corporations have taken advantage of the low-interest rates by borrowing and buying back their stocks creating a relative shortage of public equities.

Risk-Taking

Mrs. Watanabe, the Belgium dentists, and all the widows and orphans now receive zero percent (some negative percent) on their CDs and savings accounts,  suffering a shortage income from relatively safe assets.  They are forced into risky assets, such as stocks and 100-year Argentine bonds to pay for groceries and to keep the lights on.  More demand for risk, less supply of assets to buy.

It doesn’t take a genius.  True north for asset prices.

Private Equity Shifts Residential Housing Supply Curve Big Left

Helped by the foreclosure crisis, private equity and investors have become the largest holders of single-family homes converting them to rentals, shifting the supply curve of the existing homes big left. It has driven up prices and helped to create a shortage of entry and mid-level single-family homes.  The cost of building new homes has also skyrocketed due to shortages of buildable land and construction labor.   Higher prices, lower volumes – a classic negative supply shock.

All this taking place as the financial world goes virtual with AA – automation, and algos.

Efficient markets?  What is the message of the market?  You have got to be shitting me.

Napolean’s Achilles Heel

Did you catch the Achilles heel in all this?

All that corporate debt issuance may be the beast that comes back to haunt the global markets.  And when it does comes back, who will be buyers?  The JP Morgan and the Goldie bond desk?

It’s not an excess supply problem, at least, not yet.

I have no doubt, however, that once again the same words uttered by one of my corporate bond traders during a major financial meltdown when I asked him how his market was doing will show up in a Tweet gone viral,

“My market is fine.  Prices are holding up because there’s no bid.” 

Enough.  Time to move on to what is really interesting.

The Trump Deficits 

We felt very Kafkaesque this afternoon when we came across the following data from the U.S. Treasury, which we present to you tonight.   We were prompted by today’s Wall Street Journal article,

In the 12 months that ended in June, the deficit totaled $919 billion, a 22.6% increase from the same period a year earlier. As a share of gross domestic product, the year-over-year deficit totaled 4.4%, much higher than the previous 12 months.  –  WSJ, July 11th

We downloaded the data from the Treasury and started crunching.

Comparing Trump Deficits To Obama’s

We have juxtaposed the cumulative Federal deficits of President Trump in his first 29 months in office, and also the 21 months since the month of his first fiscal year, which began October 2017,  with similar similar periods of the Obama administration.   The current administration can argue they inherited the 2017 fiscal year budget and should not be held responsible.  We concur so we present both periods

We compare the Trump and Obama deficits not only because we need a point of reference but also President Trump likes to tout his economic performance relative to his predecessors.

The data show that the cumulative monthly deficits during President Trump’s first 29 months in office have almost doubled those of President Obama’s last 29 months, increasing from $1.1 trillion to $2.0 trillion, or 5.9 percent to 10.1 percent of GDP.   The increase is not insignificant.

During the 21 months since Trump’s first full fiscal year in office, the cumulative monthly deficits have increased from $902 billion in Obama’s last 21 months to $1.53 trillion, or 4.8 percent to 7.5 percent of GDP.  The increase has occurred even as nominal GDP grew at 2.5 percent faster clip.   An oddity as deficits should be declining in proportion to GDP with faster nominal economic growth.

One major caveat is the seasonality in the budget data.  For example,  April is a month of huge budget surpluses as revenues flood into Treasury to meet April 15th tax filing deadline.  This may or may not make our calculation less robust and may cause the data to look more favorable for one administration. We will take a look at it later but suspect the impact is marginal and de minimis, however.

Marginal Product Of The Deficit (MPOD)

We also calculate the marginal product of the deficits, which attempts to measure the efficiency of deficit spending and the stimulus effect.  That is, how much does the nominal GDP increase given each dollar of deficit spending.  It’s a crude and rude measure but interesting, nonetheless.   It is also very similar to the concept of the  Incremental Capital Output Ratio (ICOR).

Red Flag

The data show it is taking more and more of deficit spending or an increase in debt to generate an additional dollar of nominal GDP.   In the full 29 month period, Obama’s MPOD was 1.32, which translates — for every dollar of deficit spending or increase in debt, nominal GDP increased by $1.32.  The MPOD under Trump drops to 1.08, which illustrates the efficacy of fiscal stimulus is declining.

Note the Treasury can and does temporarily finance itself not just by issuing new debt but by running down its cash balance at the Fed or by other means, such as running arrears on certain payments.  This is a very small fraction over the longer-term and really matters during debt ceiling fights, like in the now.

There is a legion of possible reasons for the decline in the MPODs, such as how tax cuts are allocated, how, where, when and in what sectors the increased spending takes place, is the public spending investment or consumption, too much existing debt, or it could be just noise.  We will leave it to the academics and Ph.D. dissertations to nail it down and deal with the other issues, such as the relative seasonalities in the different data series,

Take heed, however, the U.S. and world may be or have already entered a debt trap just as much as it currently finds itself — more so the rest of the world — in a monetary policy liquidity trap.

Conclusion

The data couldn’t be more clear.  President Trump is no traditional conservative.

The above analysis reminds me of a modern-day version of the old LBJ-Barry Goldwater political colloquialism,

In November 1964, my liberal friends told me if I voted for Barry Goldwater,  there would be a major escalation in Vietnam.  I voted for Barry Goldwater and, sure as night follows day, we got the escalation in Vietnam.  

The modern-day version goes something like this,

In November 2016, my conservative and Tea Party friends told me if I voted for Bernie, the budget deficit would explode and the national debt would skyrocket.  I voted for Bernie and…..    Do I need to finish?

Debt Ceiling

Finally, keep the debt ceiling debate on your radar, folks.

The jousting continues,

“I am personally convinced that we should act on the caps and the debt ceiling,” Pelosi told reporters, “prior to recess.”

For a brief time, White House negotiators agreed the two issues should be coupled, but they have since started to change their minds as a deal with Democrats on the top-line spending numbers has proved elusive.

They are now worried that a spending deal with Pelosi will add more than $300 billion to the deficit over the next two years and damage Trump’s reputation as a fiscal conservative with Republican voters.

By separating the debt limit from the spending talks, White House negotiators believe they will have more leverage to press Democrats to accept a smaller spending increase for domestic programs.

But congressional Republicans are warning the White House that a vote on just the debt limit would invite trouble.  — The Hill

The White House worried about the “damage to Trump’s reputation as a fiscal conservative with Republican voters?”    I want some of the Tea that party is drinking.

There’s that bizarro dimension to write the next chapter we spoke about earlier.

Let’s keep it real, folks.

Show me the money data!

Appendix

Why do we look at the Obama administration’s last months rather than the first months in office?  The two economic environments we compare are very similar.  Obama assumed office during an economic collapse and it took many months for the country to stabilize.

Notice The Similar Job Markets? 

Fiscal Years 2018 and 2019 – The Last 21 months

Sources Of Federal Revenues And Outlays – Fiscal 2019