23 Mar WILL JAMES CARVILLE BE CLAIRVOYANT?
“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But know I would like to come back as the bond market. You can intimidate everyone.” James Carville Advisor to President Clinton while discussing domestic spending in the 1993 budget debate.
The Clinton Administration was debating the scope of domestic spending but was curtailed as the global bond and equity markets were selling off because of these tentative proposals “holding the rest of the world as hostage” as per Carville.
Stripped down to basics, the new consensus in economics goes like this: It is fine for government to borrow and spend more money—so long as they can get it cheaply.
I think the greatest uncertainty in any outlook is the forecast of interest rates. Unfortunately, the ability to project has not been great in either direction or amount. For example, for many years the Federal Reserve issued a “Central Tendency” which is essentially is a forecast of interest rates, unemployment and growth. Roughly speaking from 2010-2016 it was the same…4% growth and 2% inflation and 5% unemployment.
Because of many years of missed forecasts, the Fed abandoned “Central Tendencies” and began focusing on the “dot plot.”
For years, estimates of future borrowing costs have tended to be too high—leading to projections of bigger debts, and helping deter public spending. Some worry the opposite could happen now: politicians growing complacent about low interest rates, borrow and spend too much, then will get a nasty surprise when rates spike.
Some believe today via government bond purchases, the government can control long term interest rates. The illusion of central banks buying other nation’s sovereign debt has been shattered with only the financial media believing such an environment exists. The only purchasers of US debt have been the Federal Reserve and pension accounts according to multiple Fed reports. Other countries are only purchasing their sovereign debt.
The above is a tenant of Modern Monetary Theory (MMT). There has been experimentation with MMT but all ended disastrously as yields spiked albeit the experimentation occurred in lesser developed countries.
Commenting about yesterday’s market activity, the NASDAQ advanced as Treasury yields nominally dropped. Bank America was another firm that declared the Treasury market has just entered its first bear market in forty years.
Bank America believes this sharpest selloff in Treasuries in five decades are set to reverberate across investing strategies hitched to cheap-money era, specifically citing the crossed asset linkages between technology stocks and US debt.
The Bank writes co movement have turned the most negative since 1999, an environment “very frightening given the concentration of wealth in one sector and still near record low rates.”
Several times I heard James Carville speak. I found him very entertaining with great command of the issues at hand. Will his 1993 comment become clairvoyant?
Just as an aside, late yesterday afternoon, Bloomberg reported the President is preparing a pair of proposals to invest in “infrastructure, education, work force development and climate change,” amounting to $3 trillion.
Wow! The Administration did use the word “unprecedented” describing this proposal and the $1.9 trillion already signed into law. I don’ t think anyone would argue with this description.
Last night the foreign markets were down. London was down 0.36%, Paris down 0.45% and Frankfurt down 0.23%. China was down 1.14%, Japan down 0.61% and Hang Seng down 1.34%.
The Dow should open moderately lower. NASDAQ futures are off about 0.5%. Equities are taking their que off of a planned lockdown in Germany amid a resurgence of virus cases. The 10-year is up 19/32 to yield 1.63%.