BofA Global Research Historical Charts; S&P 500 Breakout and Fed Keynesians
By the Curmudgeon with Victor Sperandeo
We took a break this week from our objective reporting and incisive analysis. Instead, we present a set of historical charts, courtesy of BofA Global Research. Thats followed by a current chart of the S&P 500 which broke out to the upside this week despite some negative news and a Moodys ratings downgrade. Victor weighs in with his comments on the Fed and its Keynesian employees.
Historical Charts from BofA Global Research:
This is the most important longest picture of past 15 years the collapse in the price of money to 5000-year lows and abrupt end to this period of monetary excess in the past 2 years.
In the past 15 years revolutionary monetary policies of QE, ZIRP, NIRP, YCC (1,343 rate cuts, $23tn of asset purchases by central banks) caused an unprecedented decline in short- and long-term interest rates; this collapse in the price of money was unambiguously positive for financial assets, particularly US stocks & High Yield bonds.
On March 9th, 2020, the 10-year U.S. Treasury yield hit 0.3%, its lowest level ever. 3½ years later, 10-year yields are close to 5% as the pandemic, war, fiscal excess, and inflation have caused a dramatic rise in interest rates, a rise that has and will continue to suppress bond and equity returns in the 2020s.
Technological disruption has also been a big driver of disinflation and asset prices over the past 30 years.
Technological disruption has reduced the price of goods & services (internet increased supply), and the price of labor (via robotics, automation, internet & now AI); unambiguously disinflationary this century, the evidence that tech disruption has increased productivity is much less compelling.
Tech remains the leadership sector in world and particularly US equity markets; but the social & wealth inequality that has resulted from tech disruption, the monopolistic power of Big Tech, plus unintended consequences of greater AI, clearly threaten the sectors singular dominance via greater regulation & taxation, hence the sectors increasing claims to be a sector of national security.
A new secular theme in the 2020s is bigger government, a big reason why bond yields have risen so dramatically in recent years.
The U.S. government deficit in Q32023 was 8% of GDP, the largest deficit in history outside of war and recession; government spending as % of GDP currently equivalent to 44% of GDP a level matched during WW2; the size of the proposed 2024 Biden budget is so large ($6.9tn) it would make the US Federal government the 3rd largest economy in world GDP terms.
A new investment risk is that bond yields may need to rise to levels that cause greater fiscal spending discipline; but 2024 is a huge election year (voters in countries that represent 80% of global equity market cap, 60% of global GDP, 40% of world population head to polls next year) which is not a political incentive for discipline.
Fiscal excess in the 2020s is adding to already high levels of government debt; until policy makers address the trajectory of government debt, investors are likely to worry that asset-bearish solutions to indebtedness such as inflation, default, currency debasement, are set to be pursued; but as likely central banks may simply bail out governments in coming years via QE & the introduction of YCC (policies that would be v U.S. dollar negative).
U.S. STATED public debt is $33.6 trillion, which does not include off-budget and unfunded liabilities. Thats more than the combined GDPs of China, Japan, Germany, and India. The CBO projects the US government debt will rise by $20 trillion next 10 years thats $5.2 billion every day or $218 million every hour!
Total world debt including government, corporate and household) hit a record $227tn in Q123, up from $110tn in 2007 & $0.5tn in 1952.
The Feds balance sheet peaked at an extraordinary 38% of GDP in 2022, up from 19% in 2019, and on average 5% in the 60 years that followed WW2.
The global central bank liquidity supernova of the past 15 years caused a great asset price inflation; central banks are now reducing global liquidity down $5tn since Feb'22; but bulls can legitimately say there is still "excess liquidity"; and almost all investors believe the next negative economic/financial event will be met with another bout of Fed & central bank panic.
BoA Global Research believes central banks are still in business of bailing out Wall St, and governments now very much in the business of bailing out Main St, so the ultimately monetary policy destination in the 2020s may be Yield Curve Control policies across the G7 to finance fiscal excess and government debt.
Never before in the history of the U.S. has the value of US Treasuries fallen for 3 consecutive years as they are on course to do in 2023 (-7% in '23, -17% in '22, -4% in '21). [Victor notes that from 1977-1980, the U.S. long-term bonds were down 4 years in a row. Source: Ibbotson Associates].
Buy humiliation we believe that bonds will outperform in 2024 (despite our structural negativity on the asset class); the out performance will be driven by the most old fashioned of reasons recession.
S&P 500 Breakout Despite Fundamental Negatives:
The S&P 500 Index (SPX) achieved an upside breakout this week by closing above its mid-October high as well as its declining long-term trend resistance line. This is shown in the following chart:
Also, the NYSE Advance-Decline line rose strongly last week, closing just below both its 50-day and 200-day average lines.
U. S. equities rose strongly despite several fundamental negatives:
l Consumer sentiment fell in November for the fourth month in a row due to worries about higher interest rates as well as war in the Middle East. The preliminary reading of the sentiment survey declined to 60.4 from 63.8 in October, the University of Michigan said Friday. Its the weakest reading since May. A gauge that measures what consumers think about the current state of the economy slid to 65.7 this month from 70.6 in October.
l Fed Chairman Jerome Powell said that inflation remains too high, adding that despite the progress being made in lowering it, there is still a long way to go.
l Moodys Investors Service on Friday lowered its ratings outlook on the United States government debt to negative from stable, pointing to rising risks to the nations fiscal strength. In the context of higher interest rates, without effective fiscal policy measures to reduce U.S. government spending or increase revenues, the agency said. Moodys expects that the U.S. fiscal deficits will remain very large, significantly weakening debt affordability.
l Credit card debt skyrocketed in the 3rd quarter. Americans now owe $1.08 trillion on their credit cards, according to a new report on household debt from the Federal Reserve Bank of New York. Credit card balances spiked by $154 billion year over year, notching the largest increase since 1999, the New York Fed said.
l Ken Griffin, head of the Miami-based hedge-fund manager Citadel, said higher baseline inflation may go on for decades, caused by structural changes that are pushing the world toward deglobalization. Speaking at a Bloomberg forum in Singapore on Thursday, Griffin said this will have an impact on the cost of funding the U.S. deficit. He added that the U.S. is spending on the government level like a drunken sailor, and that higher interest rates are something the government hadnt counted on when we went on the spending spree.
Victors Comments on the Fed:
1. Feds 2% inflation target is unrealistic! Its critically important to note that in the post World War II period (starting in 1946), the CPI has only been under 2% for 26% of the time, measured on a rolling 5-year basis.
Therefore, its extremely unlikely that the Feds goal of reducing the year over year inflation rate to under 2% will occur over any meaningful time period.
2. Readers should realize that the Feds 400+ PhD economists are educated in the same mentality as Keynesians, and they all think alike. Keynesian economics argues that demand drives supply and that healthy economies spend or invest more than they save. To create jobs and boost consumer buying power during a recession, Keynesians say that governments should increase spending, even if it results in huge budget deficits.
3. Apparently, the Senate wont approve non-Keynesians to be members of the Fed Board of Governors. There are seven members, and a full term is 14 years. Here are two examples:
A] Trump pulled potential Fed nominee Steve Moore in May 2019 after several Senators voiced concerns to the White House and made clear that Mr. Moore did not have the votes to be confirmed.
B] In November 2020, Free Market Monetarist Judy Shelton was not confirmed by the Senate. Sheltons year-and-a-half-long candidacy faced skepticism from both sides of the aisle over her support for tying the value of the dollar to gold and remarks downplaying the importance of the Feds political independence.
4. Austrian School economists and Monetarists wont be confirmed as members of the Feds Board of Governors anytime soon. Evidently, only believers in bigger government and more spending should seek that coveted position.
5. This is why the Fed will never be right on its monetary policy which is predicated on creating immense amounts of money out of thin air and buying securities whenever theres a crisis (e.g., mortgage meltdown and COVID pandemic). Its all about holding on to power rather than whats good for majority of people.
End Quote from Judy Shelton:
Look at the Feds latest H.4.1 statement. They are paying 4.9% on $3.4 trillion on bank reserves; they are paying 4.8% on $2.6 trillion in money market mutual funds parked overnight through reverse repurchase agreements. Just think: The Fed is shelling out an annualized $291 billion on $6 trillion in cash to keep it from going into the real economy. Its more than the Fed earns on its own portfolio, so Treasury is advancing funds. How much of that interest being paid by the Fed is going to foreign-owned financial institutions?
Be well, keep active, and try to be objective in this age of disinformation and propaganda campaigns. Till next time .
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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