Watch out, stocks are not the only thing flying. Recently I outlined my concerns about the cost of carry as rates are rising and I’ve outlined my analysis in The Debt Beneath. As rates are rising I’m keeping a very close eye on the data points that are coming in and I encourage everyone to do the same. And based on what I’m seeing it’s enough to issue a general macro alert. Things may not be as rosy as they seem.
Quick reminder of the main premise: The world is so indebted courtesy of artificial low rates that rising rates will present a clear and present danger to the sustainability of economic growth in the long term.
Hence a couple of key data developments in recent days.
Firstly the 10 year has now broken above its long term trend:
Every time the 10 year has come close to its trend it produced a rejection in many cases because the Fed had to intervene as stock prices collapsed. We saw it in 2000 and 2007, but also in the early 1990s.
So what you say, the 10 year is still historically low. Oh yea?
Interest payments on debt for the US government flew to a record high in Q4. And no, this is not only driven by increased deficit spending ( and much more to come), this is simply a reflection of the Fed having raised rates by the tiny amounts they have implemented so far:
We’re just at the bottom end of 2004 levels here, historically still in the gutter. Yet the combination of ever more debt that is subject to now higher rates is already producing a historic increase in interest payments on debt. They can still manage this, but know it’s an imminent problem for rolling out a federal budget. Incidentally we don’t have a federal budget at the moment as Congress just kicked the debate another few weeks into February.
The other macro kicker this week was the continued value destruction in the US Dollar. How much has the recent rally been driven by the weakening of the dollar?
You tell me:
But we may soon find out as the dollar is at a very critical technical juncture here:
We’ve outlined the technical case here in King Dollar – Comeback?
I’ll leave you with another macro chart to noodle on. Federal receipts as a percent of GDP have been falling to negative, including in 2017:
Grey areas are recessions.
Perhaps tax repatriation will give this all a bump, but then corporations are now paying less and some consumers do as well. What the net effect will be in 2018 remains to be seen, but the organic trend is down and negative. A familiar pattern that has presaged recessions to come.
Keep watching the data.