I’ve been kicking around a related trade idea that I wanted to bounce off you in the off chance you read this; Lever long 1-3 year UST via OOTM calls on SHY paired with levered long yen via OOTM calls on FXY. In order to meet its funding obligations, I’d think the short term treasury rate has to come down (wondering if the change in inflation calculation Gromen wrote about is the impetus for govt to remove inflation from the narrative) which would be constructive for 1-3 year treasury bonds and should help weaken USD, esp in recession. Conversely, if the BOJ has lost its grip on YCC, I’d think the yen would continue to bounce, perhaps extremely if the USD simultaneously declines. So, the trade should win if the US economy is in recession, the fed cuts (or maybe just pauses) and USD weakens, or if the BOJ has lost the script and the JPY continues to strengthen. Max torque if both happen. As Grant might write “widows and orphans, avert your eyes”...lol...Have a great weekend!
I’d really recommend you read Michael Pettis and Matt Klein’s Trade Wars are Class Wars. Spending is not the problem. We will inflate it away through financial repression aka stealing money from old people slowly. The inflation since 2021 has already decreased the debt to gdp 11% from where it would have been. The real problem is the imbalance of trade. If you cut federal spending and leave our capital markets open all that will happen is that foreign export driven countries will blow up a bubble in some private market (see housing bubble). The dollars we spend on their goods have to go somewhere. If they don’t recycle them then their exports will get more expensive and their economies will collapse. So they aren’t buying our financial assets as a favor. They have to buy them. We’re providing them as a favor. In the end I like to see use regulate our capital markets to prevent excessive inflows but that would mean taking on Wall Street and those that benefit from high asset prices aka everyone with power.
Thanks David. This will end with Central Banks & Governments world wide agreeing to write off the majority of their debt and “promising” to never engage in deficit spending again. The Fed, BOJ, ECB, IMF and others have their own bloated :"balance sheets" owning their respective governmental debt. They forge a deal where they write off Trillions on their balance sheets and restart the game. The countries with little debt to write off have to hold their noses, because what else are they going to do? Avoids crushing taxes and those painful governmental spending cuts. You don't give 1 freshly minted Trillion USD coin to China, you give 8 coins to the Fed and wipe away $8 Trillion of US Debt. it's the only way out.
There's a big piece missing in your analysis. CHINA. The worlds 2nd largest economy is on a credit creation path. I think this is the main cause of financial conditions easing since Oct/Nov into the current meltup.
There will be a massive debt issue, when I do not know ... But not in the short not intermediate timeframe IMO.
EXCELLENT!! Please keep up the good work!! The USA needs MORE sanity!!
I’ve been kicking around a related trade idea that I wanted to bounce off you in the off chance you read this; Lever long 1-3 year UST via OOTM calls on SHY paired with levered long yen via OOTM calls on FXY. In order to meet its funding obligations, I’d think the short term treasury rate has to come down (wondering if the change in inflation calculation Gromen wrote about is the impetus for govt to remove inflation from the narrative) which would be constructive for 1-3 year treasury bonds and should help weaken USD, esp in recession. Conversely, if the BOJ has lost its grip on YCC, I’d think the yen would continue to bounce, perhaps extremely if the USD simultaneously declines. So, the trade should win if the US economy is in recession, the fed cuts (or maybe just pauses) and USD weakens, or if the BOJ has lost the script and the JPY continues to strengthen. Max torque if both happen. As Grant might write “widows and orphans, avert your eyes”...lol...Have a great weekend!
Great piece (again) Dave, keep up the good work.
Maybe this is why Cathie Wood is so happy......
"......even if Jim Cramer is, once again, proclaiming the bear market dead and gone."
I’d really recommend you read Michael Pettis and Matt Klein’s Trade Wars are Class Wars. Spending is not the problem. We will inflate it away through financial repression aka stealing money from old people slowly. The inflation since 2021 has already decreased the debt to gdp 11% from where it would have been. The real problem is the imbalance of trade. If you cut federal spending and leave our capital markets open all that will happen is that foreign export driven countries will blow up a bubble in some private market (see housing bubble). The dollars we spend on their goods have to go somewhere. If they don’t recycle them then their exports will get more expensive and their economies will collapse. So they aren’t buying our financial assets as a favor. They have to buy them. We’re providing them as a favor. In the end I like to see use regulate our capital markets to prevent excessive inflows but that would mean taking on Wall Street and those that benefit from high asset prices aka everyone with power.
Interesting points and thanks for the recommendation!
You are a very gifted writer!!! Really appreciate the way you put the pieces of the puzzle together. Thank you and keep up the good work.
Thanks David. This will end with Central Banks & Governments world wide agreeing to write off the majority of their debt and “promising” to never engage in deficit spending again. The Fed, BOJ, ECB, IMF and others have their own bloated :"balance sheets" owning their respective governmental debt. They forge a deal where they write off Trillions on their balance sheets and restart the game. The countries with little debt to write off have to hold their noses, because what else are they going to do? Avoids crushing taxes and those painful governmental spending cuts. You don't give 1 freshly minted Trillion USD coin to China, you give 8 coins to the Fed and wipe away $8 Trillion of US Debt. it's the only way out.
A well known but disregarded issue.
There's a big piece missing in your analysis. CHINA. The worlds 2nd largest economy is on a credit creation path. I think this is the main cause of financial conditions easing since Oct/Nov into the current meltup.
There will be a massive debt issue, when I do not know ... But not in the short not intermediate timeframe IMO.
Almost $1 TRILLION on “climate change” since 1995 certainly didn’t help things.
https://envmental.substack.com/p/sacrificing-humanity-on-the-green-766
Excellent piece. Thanks for putting your thoughts out there for us!