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What is the Bond Market Really Telling Us?

madhedgefundtrader's picture




 

Everywhere I turn these days, I hear a rising clamor and rancor to cut the spending that is creating deficits that will lead to the death of us all and destroy the lives of our grandchildren. CNBC reporter rick Santelli walked off camera maniacally screaming “stop spending, stop spending,” while commentator Larry Kudlow religiously devotes a full hour to the topic every day.

My interest piqued, and to attempt to bring some clarity to readers who must be as befuddled as me, I decided to find out what this borrowing is all about. And what do I find in my mailbox, but the chart below from my friends a Clusterstock. If a picture is worth 1,000 words, then this one is worth 2,000.

Out of a current projected budget deficit of $1.3 trillion, $700 billion, or 54% comes from the Bush era tax cuts, $320 billion (25%) from a tax revenue fall off caused by the Great Recession, $200 billion from the wars in Iran and Iraq (15%),  and $50 billion (4%) is generated by Obama’s recovery measures. The TARP and the bailout of Fannie Mae and Freddie Mac are so small, they don’t even register on the chart. All of the angst, complaining, moaning, blustering, and carping is about the 4%.

You often see this in politics, where the debate gets focused on where the problem isn’t, not where it is, and is a big reason why I’m not in that business. Markets have a fascinating way of seeing straight though this impenetrable fog. So while the noise out of Washington is trying to convince us that these deficits are ruinous, the ten year Treasury bond yields we saw yesterday at a stunning 2.97% are telling us that, in fact, they are no problem at all, and that the government can now borrow nearly infinite amounts of money at the lowest interest rates in history.

There are some other really interesting things that this chart and the bond market are telling us. The Bush tax cuts expire next year, and a recovering economy will bring a return of tax revenues, eliminating 79% of the deficit. The scheduled withdrawal from Iraq next year will cut another 7%. This assumes that Obama is unable to get a single additional piece of legislation through the congress, a distinct possibility if he loses control of congress in November.

This is the writing on the wall the bond market is attempting to focus our blinkered eyes on. If anyone else has another set of believable numbers that reaches a different conclusion, I am all ears.

And what happened to Franklin D. Roosevelt’s grandchildren, the last president to preside of massive, depression fighting government borrowing? That would be me and my generation, and I think we’ve done pretty well.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

 

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Fri, 07/09/2010 - 11:39 | 460579 QQQBall
QQQBall's picture

Ha! Linear thinking. Higher tax rates and we are all saved via higher revenues. Pretty lame thinking

Fri, 07/09/2010 - 11:38 | 460576 Thoreau
Thoreau's picture

"... a recovering economy will bring a return of tax revenues, eliminating 79% of the deficit."

This deserves no comment whatsoever.

Fri, 07/09/2010 - 11:57 | 460640 Meridian
Meridian's picture

That is the "and then a miracle happened" part of his inane argument.

Fri, 07/09/2010 - 13:49 | 460838 viahj
viahj's picture

Step 1: Collect Underpants

Step 2: ?

Step 3: Profit

 

Fri, 07/09/2010 - 11:50 | 460602 LePetomane
LePetomane's picture

But this time it's different.  Oh look the fog's rolling in.

http://www.youtube.com/watch?v=n6hOBVaMGFI

Fri, 07/09/2010 - 11:37 | 460568 AR15AU
AR15AU's picture

The bond market is manipulated...  it doesn't really say much other than "look at me, I'm a manipulated market".

Fri, 07/09/2010 - 11:35 | 460566 Ragnarok
Ragnarok's picture

This completely ignores the rolling of existing debt which according to June is ~3x larger than new issuance.

Fri, 07/09/2010 - 12:05 | 460658 hungrydweller
hungrydweller's picture

Also completely ignores that the marginal productivity of debt is now negative.  We have reached debt saturation. 

Fri, 07/09/2010 - 11:43 | 460589 Seer
Seer's picture

Yes!  This is The issue!

Fri, 07/09/2010 - 11:34 | 460565 Rogerwilco
Rogerwilco's picture

And doubling tax rates always increases economic activity -- genius sir!
/s

Fri, 07/09/2010 - 11:47 | 460597 Seer
Seer's picture

Yeah, trickle down, I think that I've heard that one before...

Fri, 07/09/2010 - 11:56 | 460623 Rogerwilco
Rogerwilco's picture

@Seer Are you one of those folks that believes the "optimum" marginal rate is north of 60%? Please explain how taxing the shit out of productive people helps promote economic growth and your egalitarian dreams.

Fri, 07/09/2010 - 19:46 | 461483 ArmchairRevolut...
ArmchairRevolutionary's picture

I am not defending the article, but I will take on your challenge.  High marginal tax rates force those on the upper end of the wealth scale to actually be productive.  Your suggestion that they are productive is just plain wrong.  They do not have to be productive.  Instead they are rent seeking; living off the productivity of others.  In effect, your argument ensures economic slavery of lower and middle classes.

Rogerwilco, only mathematically challenged individuals believe your kind of nonsense.

Fri, 07/09/2010 - 23:36 | 461774 Rogerwilco
Rogerwilco's picture

@armchair If higher marginal rates improve productivity, why not go all in and confiscate 100% of earnings above some arbitrary cap? Your argument is ridiculous because no rational person would freely participate in the scam you describe. They would find ways to game the system, or leave it altogether.

Fri, 07/09/2010 - 13:02 | 460755 Coldsun
Coldsun's picture

I believe he meant to say Trickle Up.

 

Trickle Up Poverty that is...

Fri, 07/09/2010 - 11:33 | 460561 fireangelmaverick
fireangelmaverick's picture

Oh man this is deep. MHFT you are the most stupid guy on this blog. Even Leo shows more sense than you. Pray, what was the Greek 10 year bond yield under 4% telling the greeks in November 2009?

 

Fri, 07/09/2010 - 12:47 | 460714 Noah Vail
Noah Vail's picture

Hey, go easy, the man has some paper to sell. If you want advice about used cars, be sure to consult a used car salesman. I'm sure MHFT merely forgot that half the US debt is short term and rolls in couple years. I can get this kind of propaganda from any economists web site, don't need to see it here.

 

(You should congradulate me for not letting loose with the worst string of obscenities ever written, LOL)

Fri, 07/09/2010 - 13:17 | 460781 Winston Smith 2009
Winston Smith 2009's picture

"The Bush tax cuts expire next year, and a recovering economy will bring a return of tax revenues, eliminating 79% of the deficit."

Thus placing a greater burdon on the already strapped consumer.  Yeah, that'll turn out well.

"The scheduled withdrawal from Iraq next year will cut another 7%."

Kinda' like the beginnings of "scheduled withdrawal" from Afghanistan?  Har!  Yeah, those deadlines will be met.... 

Fri, 07/09/2010 - 13:13 | 460770 Winston Smith 2009
Winston Smith 2009's picture

"I'm sure MHFT merely forgot that half the US debt is short term and rolls in couple years."

Yep!  The US of A has one hell of a large ARM and when those rates go up as they inevitably will, our mortgage payments will be rather huge...

Fri, 07/09/2010 - 11:42 | 460553 Cyan Lite
Cyan Lite's picture

Markets have a fascinating way of seeing straight though this impenetrable fog.

Exactly.  That's why the markets are up 7% this week...

Fri, 07/09/2010 - 11:29 | 460551 Gloomy
Gloomy's picture

We will be able to borrow infinite amounts of money.......until we can't!!

Fri, 07/09/2010 - 15:22 | 461013 Breaker
Breaker's picture

I think I got took. This thread has to be a joke.

Fri, 07/09/2010 - 19:35 | 461467 UnBearorBull
UnBearorBull's picture

Has to be. Absurdities galore plus the cost of the war in IRAN. 

 

 

 

Fri, 07/09/2010 - 18:23 | 461349 The 22nd Prime
The 22nd Prime's picture

Ding!

Breaker, I think you got it. I haven't read all the comments yet but while reading the post of MHFT I've been scrunching my eyebrows...200B for the wars? Fannie and Freddie are midgets?

Did I hit a worm hole on the way home and end up on April 1st?

Fri, 07/09/2010 - 17:50 | 461305 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

The TARP and the bailout of Fannie Mae and Freddie Mac are so small, they don’t even register on the chart.

I don't know so much but -- WTF? 

What numbers are being attached to these monsters?  Numbers smaller than 50B?!?!?!  Seriously, WTF???

Fri, 07/09/2010 - 15:21 | 461009 Breaker
Breaker's picture

"Out of a current projected budget deficit of $1.3 trillion, $700 billion, or 54% comes from the Bush era tax cuts, $320 billion (25%) from a tax revenue fall off caused by the Great Recession, $200 billion from the wars in Iran and Iraq (15%),  and $50 billion (4%) is generated by Obama’s recovery measures. "

This is hilarious. Obama spent $987 billion dollars in the stimulus package. That was spending in addition to whatever was there when he got in office. But today, only $50 billion of the deficit was caused by the stimulus spending. That makes a bunch of sense. Where did you get your numbers? The official DNC website?

If it turns out you are correct, does that mean I can borrow $10,000 on my credit card but only count $500 of it as debt? Please let me know how to do that when you figure it out. Maybe the bond market will whisper the answer to you.

Fri, 07/09/2010 - 11:39 | 460577 MarketTruth
MarketTruth's picture

Borrow? The Fed can just print it up. Think about it, dollars are literally free due to FIAT so free debt, free oil.... it's all free. Just another number to write in their ledger. Nothing more, nothing less.

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