USVM - Weekly Commentary: Thoughts Ahead Of Day One

2025-01-18 05:00:11 ET

Summary

• The federal government has a significant spending problem, driving deficits that have averaged a historically high 7% of GDP annually during the past four years.
• With today's financial and economic structures and associated resource allocation, what scope of 'money' and Credit growth would ensure 'trickle-down' to small-town and rural America?
• Ten-year Treasury yields dropped 12 bps on CPI, falling 14 bps for the session - ending the week at 4.63%, down 16 bps from Tuesday's close.
• The KBW Bank Index enjoys a one-year return of 46.9%, with the NYSE Broker/Dealer Index returning 63.3%, Nasdaq Financial Index 34.2%, and the NYSE Financial Index 29.2%.

January 16 - Reuters (Lawrence Delevingne, Yoruk Bahceli, Davide Barbuscia and Dhara Ranasinghe): "When Bill Clinton began his first term as president in 1993, he faced a challenge to his authority from an unexpected adversary: bond traders. Low taxes and high defense spending over the prior decade had contributed to U.S. debt doubling as a share of economic output. Clinton and his advisers worried that 'bond vigilantes' - so called because they punish governments' profligacy - would target the new Democratic administration. A run on U.S. Treasury bonds, they feared, could sharply raise borrowing costs, hurting growth and jeopardizing financial stability. A frustrated Clinton was forced to make the unpopular decision to raise taxes and cut spending to balance the budget. 'He went away pretty disgusted with the idea that here he had just won an election by a pretty nice margin in a difficult three-way race, and now he was subservient to a bunch of bond traders,' said Alan Blinder, one of Clinton's closest economic counselors… 'A lot of us are wondering if the bond market vigilantes are going to come back for a second chapter.'"

Scott Bessent is an impressive individual. He's highly intelligent and has worked very hard for a long time. Living the American dream. Having made billions, his decades-long interest in public service has turned into a full-time occupation. In Bessent's Thursday confirmation hearing, he was well-prepared, earnest, and respectful. As a seasoned hedge fund "master of the universe" - and teacher of "Twentieth Century Financial Booms and Busts" and "The Financial Panic of 2007-2009" at Yale - he grasps the challenges that await.

Bessent: "I believe that President Trump has a generational opportunity to unleash a new economic golden age that will create more jobs, wealth and prosperity for all Americans. My life's work in the private sector has given me a deep understanding of the economy and markets."

"The federal government has a significant spending problem, driving deficits that have averaged a historically high 7% of GDP annually during the past four years. We must work to get our fiscal house in order and adjust federal domestic discretionary spending that has grown by an astonishing 40% over the past four years. Productive investment that grows the economy must be prioritized over wasteful spending that drives inflation."

"This is the single most important economic issue of the day. This is pass/fail. If we do not fix these tax cuts, if we do not renew and extend, then we will be facing an economic calamity."

I would rank extending 2017 tax cuts somewhat down the list, somewhere below ongoing "terminal phase" Bubble excess, runaway federal debt, bond market fragility, speculative asset Bubbles, acute wealth inequality, over-indebted consumers and businesses, and global trade frictions.

I'm a strong proponent of free markets, fiscal prudence, low taxes, and limited government. Most unfortunately, this framework is hardly even germane at this stage of the cycle, as Credit and speculative Bubbles inflate out of control - as egregious inequality threatens societal and political stability. Unbridled finance is anathema to free market Capitalism....

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