Overheard in a Wall Street Bar…

debt and deficit

Friday evening after the bell rang on the New York Stock Exchange, traders and analysts, sell side and buy side, 2018 quants and deep value dinosaurs, million-dollar-a-year partners as well as the order takers and clerks, all got on their trains and into taxis and autos for the ride home.

Some retired to neighbourhood bars, as they usually do, to discuss the week’s events.

Bartenders must have known that something was wrong. Their patrons did not spend as freely as they had the week before. Their spirits were not as high.

They seemed subdued.

Setting off a sh*tstorm

It’s just another opportunity,’ said O’Brien, from a short-term corporate finance desk at Wells Fargo. ‘If there’s one thing we’ve learned over the last 30 years, it’s “buy the dip”.’

O’Brien is only 29 years old. He must have begun learning while still in the womb.

I’m not so sure,’ said Moroni from Blackstone’s private equity research unit. ‘Did you see that China is talking about cutting back on buying our bonds? This wild man in the White House is stirring up trouble. And he doesn’t know where it will lead.

Yeah, and now the Fed’s against us, too,’ added Schultz, recently promoted to Bank of America’s lead macro analyst on European equities. ‘I listened to [Fed chief, Jerome] Powell on Wednesday. He’s telling us that he still has our backs…but he’s going right ahead with more QT [quantitative tightening…reducing the Fed’s holding of bonds]. I know what’s going to happen: He or those clowns in Washington will set off a sh*tstorm. Then, they’ll change course. But it could be too late.’

Yeah…’ Moroni spoke again, ‘at some point, all this bullsh*t doesn’t work anymore.’

Vainglorious crank

The three men were rehearsing a conversation that went on in many different forms in many different places over the weekend. Everyone sees, more or less, the same dots:

The Fed has reversed 30-plus years of money expansion…

…The federal government is headed towards bigger budgets, bigger deficits…and a $40-plus trillion debt…

…housing is softening…consumer spending is falling…

…the bull market on Wall Street is getting long in the tooth; it’s now the second-longest ever…

…Team Trump is recklessly putting up trade barriers…wantonly annoying allies…swatting at hornets’ nests…stepping on rakes…getting fly strips stuck in its hair.

There are warmongers in the State Department (Mike Pompeo)…

…war criminals at the CIA (Gina Haspel)…

…a vainglorious crank (John Bolton, one of the chief promoters of America’s disastrous second Iraq war) as national security advisor…

…and an incompetent hack (Kudlow) as economic advisor.

Former television personality Larry Kudlow has been wrong about every major economic and financial event for the last quarter century.

Kudlow, just before the 2008–2009 crisis: ‘There’s no recession coming. The pessimists were wrong. It’s not going to happen. At a bare minimum, we are looking at Goldilocks 2.0. (And that’s a minimum). Goldilocks is alive and well. The Bush boom is alive and well.’

Horror week

And now…

‘Horror Week for the Dow…’ says Bloomberg.

What next?

Barron’s interviewed Stephanie Pomboy, founder of MacroMavens:

In January, the savings rate went from 2.5% to 3.2% in one month – a massive increase… Total retail numbers have done nothing but go down. We’ve seen the biggest increase in food and energy outlays since 2011, accounting for 30% of the increase in consumer spending in the past six months, up from 11% in the two years prior.

Consumers have had to draw down whatever savings they amassed after the crisis and run up credit-card debt to keep up with the basic necessities of life.


After the crisis, total savings rose from $440 billion to $1.4 trillion. Now it’s back to $400 billion. Consumers have basically taken every penny they socked away and spent it.

Households are borrowing 90 cents for every incremental dollar they spend, up from 40 cents four years ago.

Household debt service costs are expected to increase by $75 billion this year — almost completely offsetting any gains from the tax cut.

Pomboy also points to a $4 trillion pension deficit — public and private. Pension funds hold stocks; rising stock prices ease deficit problems. Falling stock prices make them worse.

She thinks pension systems will begin to blow up if stocks go down just 15%. The Dow is already down 12% since January 26.

Quantitative easing drove investors into stocks and bonds, she points out. Quantitative tightening should drive them into gold…and cash.

Back in the bar in Lower Manhattan:

What? So you’re saying we should sell out…and hold cash?’ asked Moroni.

I don’t know what the hell to do,’ answered O’Brien. ‘Let’s just see what happens…

Stay tuned…

Regards,

Bill Bonner,
For Markets & Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

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