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November 7, 2024 - 2:30pm
Market reports on Wednesday morning were dominated by the powerful rally in US assets across a range of classes, from stocks to crypto. However, the distribution revealed some interesting trends.
Shares in companies connected personally to President-elect Donald Trump, such as his media company, went parabolic. Those in companies which share close personal ties to him, or were seen to be favoured by him, like Elon Musk’s Tesla, as well as crypto, oil and the banking sector have equally taken off. But those seen to be in his crosshairs, from renewables and shipping companies to any sector that will be affected by import tariffs, slumped.
What this suggests is that investors are anticipating a personalised form of government — something akin to the way Vladimir Putin manages his oligarchs, in which case a savvy management strategy would be to keep Trump happy. That will deliver handsome returns to the well-connected. Yet it may not be so good for the broader economy, since there’s no guarantee these players will necessarily be the most efficient or innovative.
The really big story, though, may be what’s happening in the corner of the market that is sitting out the party: bonds. Prices on US Government paper plunged on Wednesday, driving yields up by double digits and continuing an upward trend in interest rates that has been underway for weeks. Investors, anticipating an asset bubble and rising inflation, are starting to compensate by raising the interest rate they expect to get on loans to the American Government.
But, at a deeper level, investors are also growing anxious that the US may be losing control of its debt. With a national debt bigger than the economy, fuelled by a fiscal deficit that amounts to an additional 6% of GDP each year, bond investors had already begun souring on the US. When the Federal Reserve started cutting interest rates last month despite the economy remaining buoyant, investors further concluded that the central bank had abandoned the fight against inflation.
Given that it still holds the world’s principal reserve currency, the US won’t experience a Liz Truss moment of soaring bond yields, for the simple reason that the rest of the world will continue to buy US assets — not least if the interest rates on offer there are higher than they are back home. That tolerance of US profligacy is what has enabled Democratic and Republican administrations alike to operate with an unlimited tab.
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SubscribeOne day someone will commit to cutting public spending.
And do it.
And we will all be better off.
The only way to stop America’s decline is to cut the size of its government–drastically. And that’s going to be Elon’s job. Every agency that is duplicative of similar state agencies needs to go. Off the back of an envelope Musk thought he could cut $2 trillion out of the Federal budget! Get the government out of our lives and watch America soar!
Milei is showing the way in Argentina. Spectacular results so far.
Generally a good article imo, showing the difficult spot the U.S and future Trump administration is in overall. I don’t agree with the personalized economy “akin to Vladimir Putin”, however. The renewables industry in the West is largely propped up by the governments. When government funding in a certain sector is expected to decline, it is natural that the market becomes less positive about its prospects. And even if it were true, how would that be different than Democratic administrations promoting the renewable industry and not Oil companies. Why is that not akin to Putin?
Because, whatever it is, it is okay when they do it.
Fossil fuels were and are heavily subsidized as well. The IMF estimates an annual 1 trillion of explicit subsidies a year.
Of course a lot of that is in places like Nigeria or Saudi where the residents get cheap gas (or petrol if you must) to keep them happy.
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Exactly my sentiments to become like Putin….fed goes under Treasury! Short term pain but long term opportunity to compete with China and its allies.
Wait for the ugliness. I am sorry to be a bearer of bad news!
Speculation!
The interest on US ten-year Treasury bonds is now over 4.3%. The interest on 2-year bonds is about 3% I think. Plus I gather that the US rolls over most of its gigantic debt every three months. Imagine having to remortgage your home every three months. Trouble ahead, as one of our distinguished football commentators would say.
Of course a reckoning is coming, a national debt of close to 50 trillion by 2030. The US economy lives on borrowed money and borrowed time. They will push the bubble until the ultimate crash
That is always the trick. The problem is that if you get out at the right time wherever you go will probably be affected by what happens. Good piece.
This author is plainly not a financial wiz.