As we kickoff another trading week there is no question the global debt bubble is going to unleash havoc.
When Baseballs & Guitars Say More Than Pundits
August 20 (King World News) – Matthew Piepenburg, Partner at Matterhorn Asset Management: Before I got the invite to a swank prep-school out East, I used to spend my Spring afternoons on a baseball diamond not too far from the home field of Derek Jeter, who was still playing local ball in Kalamazoo while I was harboring high-school fantasies of playing for the Detroit Tigers.
Glory Days, Simple Lessons
Those were dreamy days of young fantasy. Alas, the Tigers never called, so I hit the books rather than the minor leagues and never looked back.
But like all old men with “glory days” memories, sports taught me a lot of metaphorical lessons.
Like having a team ringer who could hit or pitch years ahead of his time (or for you football/soccer folks, a deadly striker).
Even before the first inning was over, we all knew the harsh pleasure or pain of either: 1) having a “ringer” on our team, or 2) facing one on the other team.
In short, if one team had the most obvious “heat” (or unstoppable striker), it was the team that was going to win.
It was simply the Realpolitik of sports.
Thus, if we were playing against a Derek Jeter (or a Lionel Messi), we all silently knew the game’s outcome before we bravely trotted onto the infield.
Or to put it even more realistically, if my high school baseball team ever had to play the NY Yankees, there was not a snowball’s chance in H.E. double toothpicks that we were going to win that game.
This is fairly easy to grasp. Even our coach (McKenzie) would/could admit such hard truths…
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The Debt Endgame is Obvious
Oddly, however, when it comes to US debt levels, and hence the end-game for US credit markets, rates, currencies and Fed policy, almost no one wants to see or admit the obvious.
That is, if we were to compare the Fed’s war against inflation to a baseball game, Powell’s odds are about as good as my Michigan high school team (The Lakeshore Lancers) beating the NY Yankees.
And here’s a few (and otherwise obvious) reasons why.
The Ignored Downgrade
Fitch just downgraded Uncle Sam’s IOUs from AAA to AA+.
For now, it seems no one cares. That is, most still think the Lancers can beat the Yankees.
Why?
Because the NY Times, the Wall Street Journal, Bloomberg and the Financial Times are all doing a wonderful, timely and concerted job of telling average Americans not too worry, as recession and inflation fears are now largely behind us.
Alas, has Powell beaten the Yankees?
Hmmm.
A Lying Chorus
Whenever I see a discredited cabal of media sell-outs all telling me at once not to worry, I start, to well…worry.
After all, when an FBI can have Facebook remove posts about vaccine facts or CNBC starts ignoring alternative views on a neocon war in the East, I tend to get skeptical of the “official version” of just about anything and everything.
What these esteemed financial media “experts” are failing to tell you is that the recent (and ignored) Fitch downgrade was premised upon the fact the America’s debt to GDP ratio (125%) is just too high.
In fact, it suggests that Johnson & Johnson or Microsoft have less a chance for defaulting on their debts than the United States.
What our media guides are also failing to mention is that the Fitch downgrade of 2023 was preceded by a similar S&P Rating downgrade in August of 2011.
Two Downgrades, Different Signals
What’s different about the August downgrade of 2023, however, is that Uncle Sam’s debt levels are much higher (scarier) than in 2011.
In fact, bond demand (as measured by the TLT) actually rose by 25-30% after the 2011 downgrade!
Really?
See for yourself:
This was because folks still believed the US of A and its IOUs were simply too big to fail and that such “risk-free” Treasury bonds were a safe-haven in any storm.
By 2014, however, the rest of the world was singing a different tune.
When adjusted for inflation, then as now, those so called “risk-free-returns” were nothing more than “return-free-risk,” which is why foreigners have been net-sellers of Uncle Sam’s IOUs ever since…
And what is even more interesting about the downgrade of 2023 is the fact that more Americans are finally catching on to this.
That is, and unlike the 2011 response to the S&P downgrade, the 2023 downgrade led to a dumping rather than buying of those very same (and increasingly downgraded) IOUs.
Again, see for yourself:
Main Street Finally Catching On?
What these charts are saying is that Americans are slowly starting to see the end-game of our debt-strapped American baseball team.
For decades, our dads and grand-dads have taught us to seek bonds as protection in dangerous times.
That is why US retail investors and US banks have either been suckered (on Main Street) or forced (at the bank level) to buy Uncle Sam’s promissory notes for decades with blind faith in DC’s ability to, well, beat the NY Yankees…
In 2023, however, more folks are distrusting what is an essence a negative-returning 10Y UST (i.e., what the fancy lads call “negative term premiums”), which means US bonds aint our dad’s (or grand-dad’s) “safe-haven” anymore.
Powell Running Out of Good Pitches
This, of course, poses a real problem for Powell’s baseball game against inflation, for Powell has no good fastballs left, just a weak curve ball (Fed’s balance sheet) and a crappy slider (rate manipulations).
That is, whenever the bond market runs out of liquidity (as he saw in the repo crisis of 2019, the UST crash of 2020 or the recent bank failures of 2023), Powel only has two choices/pitches to work with, namely:
- Do nothing (and watch bonds tank, rates spike, deflation rip, economies crumble and markets frog boil toward implosion), or
- Reach for that magical mouse-clicker at the Eccles Building and print more fiat money (and hence monetize Uncle Sam’s debt with inflationary bravado).
Powell’s Endgame vs. Powell’s Fantasy
For me, the end-game is clear.
In fact, I see it as clearly as if my Lake Shore Lancers were forced to play 9 innings against Jeeter’s Yankees, namely: “We’re gonna lose this game.”
For now, we are only in the first innings of this painful and embarrassing contest.
Powell, having broken the middle class, a number or regional banks and the normal shape of a robust yield curve, is already declaring victory over inflation and recession (along with a chorus of “yes-sayers” from the WSJ to the FT) and continuing his higher-for-longer fantasy of rising rates into the greatest debt bubble of world history.
How’s that for fantasy?
Maybe I should I try out for the Yankees myself?
Ignoring the Ringer (and the Math)
But what Powell (and the consensus-driven markets) aren’t seeing is the ringer on the other team—namely the fast-ball reality of simple math.
That is, as Powell raises rates, the cost of Uncle Sam’s debt has now crossed the Rubicon of payable.
Ironically (and sports are full of ironies), Powell’s war against inflation is in fact going to end up being inflationary, as the only way to inevitably and eventually pay the interest expense alone on Uncle Sam’s $33T deficit is via a money-printer.
And that, folks, is inflationary (what the fancy lads call “fiscal dominance”), which is bad for long-dated IOUs but good for gold.
Thus, and regardless of current headlines, bullish fantasy and media-ignored credit downgrades, I see yields on sovereign 10-years going higher for longer, which is not a view shared by consensus or those who even feel that a great high school team can beat the Yankees.
The Hopeful Crowd
Of course, there are those who may feel and hope that Powell and his squad of weak-armed experts can get US debt to GDP levels from 125% to 80% (which is the only ratio where normalized rate hikes work) by cutting spending costs.
Hmmm.
In that case, Powell and his equally weak teammate at the US Treasury Department (Yellen) or perhaps even Joe Biden, with his 20 MPH mental fast-ball at the White House, can sit down and decide where the USA is willing to tighten its belt.
Will it be by cutting entitlement spending?
Good luck staying in office with that game plan…
Will it be via military cuts?
Those who truly run DC from the Pentagon are not likely to agree…
Or perhaps there are still those deluded fans in those high-school bleachers who think Powell can grow his way out of a 125% debt to GDP ratio?
Hmmm.
Well, mathematically (just saying), such a gameplan would require 6 consecutive years of 20+% GDP growth, something which can (and will) NEVER happen in a high-rate baseball field.
The Angry Crowd
Thus, the only way to “grow,” and the only way to save Uncle Sam’s unloved bond market, is via liquidity, and that liquidity ain’t coming from GDP, tax receipts or 20% economic growth.
Nope.
It’s gonna come from a Fed mouse-clicker. Trillions of fiat Dollars—and that folks, IS gonna be inflationary, and it’s gonna crush the guy on the street, farm or high-school coaching staff.
In short, Powell’s fight against inflation is just in the 3rd inning.
In the end, inflation and negative real rates are the only pitchers/options left in Powell’s weak bullpen (short of a deflationary depression), which means, alas, he won’t be winning this game in the 9th inning.
Of course, such baseball metaphors, math, policy and inflation/deflation cycles aren’t easy to time with precision nor be understood with fancy Wall Street lingo by every Jane or Joe on Main Street.
Afterall, not everyone has the time or luxury to debate monetary policy (or baseball memories) when they are just struggling to make a car payment or fill their gas tanks (and those prices are going to go higher) as the BLS fudges the math on inflation data or the NBER tweaks its comical (and lagging) recession indicator for political rather than transparency motives.
But whether one be carrying a baseball bat or a guitar, it’s becoming clear from Farmville Virginia to Stevensville Michigan that something is “broken in the force.”
As distrust of a weaponized media, Dollar and justice system collides with politicized science and rigged markets, Americans are steadily losing faith in the so-called “experts.”
Toward this end, I won’t be the first nor the last to remind readers of the recent viral sensation, and Virginia guitar-picker, Oliver Anthony.
He recently opened his new American anthem by declaring “it’s a damn shame” that he’s “been working overtime-hours for bull-sh— pay” in a new world where “your dollar aint sh– and taxed to no end,” while the rich men North of Richmond “just want total control.”
Sound familiar?
Strike a cord?
More times than not, a baseball or a guitar can say more than a financial blog.
This debt game is going to end badly. They ALWAYS do.
PS: I love Richmond…This will link you directly to more fantastic articles from Egon von Greyerz and Matthew Piepenburg CLICK HERE.
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