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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bIlluminati's picture

While 10 and 30 year interest rates are at and near historic lows, th DOW and S&P are off 30%. What this tells me is that banks would rather loan what they regard a sure2-3% spread, than risk credit card loans at 15-29%. They'd like to make some house loans at 4.5-5.5%, but there is little demand.

Also, AAPL, MSFT, GOOG, CSCO and others are sitting on massive cash. They don't see tech stock prices as cheap enough to go on an acquisition spree. When these companies think the economy is generally safe, we will see that cash pile decrease, whether they buy back their own stock, invest in factories, or make acquisitions. They're not banks, so they won't pay 40%-60% of their profits in executive bonuses. Maybe they are just anticipating a corporate wealth tax.

And the proposed 1% transaction tax will wipe out hundreds of billions in equity, as buyers can't get together with sellers.

HCSKnight's picture

I had my doubts about MHF.... I didnt realize they could so quickly be confirmed to be generous beyond imagination.

MHF, you're either an idiot or so blinded by your political bias you cant think.

economicmorphine's picture

God, I feel like I'm in class with Blutarski.  

Vendetta's picture

there is a recovering economy?  Where? 

halvord's picture

Indeed, MHFT. Please be quiet; the adults are talking like 3-year-olds.

Hondo's picture

Very funny stuff. All based on "a recovering" economy. How does that happen under current conditions with the largest tax increase in history. The logic is the kind of misguided logic that creating more debt for a debt problem is the solution ... Insane!

ozziindaus's picture

EXACTLY. Look to the bond markets as the closest thing to a crystal ball other than public sentiment. Interest rates are a measure of risk and low interest rates signal high risk or uncertainty in the economy, and that includes the equities. Combine that with a stable and rising USD, then you have all the indicators you need to determine inflation vs deflation. 

So before anyone spouts off garbage about hyperinflation, banana helicopters and printing presses, the bond market has something else to say. 

Mitchman's picture

Other than all the stuff written in the posts, it seems that people really enjoyed this article.

kaiserhoff's picture

MHFT, like the Simpsons, is really funny if you are stoned or blind drunk (or as my Cambridge buddy liked to say, pissed as a rat).  Otherwise, he should be avoided at all cost. 

Note to Tyler.  This is not a penny stock rag anymore, and this stuff is really a distraction. 

masterinchancery's picture

Wrong on every count--income has been pushed forward precisely to avoid the tax increases next year.  FDR started with a treasury that, thanks to some good presidents in the 20s, had virtually no debt, not the Weimar Republic that we are turning into.  And what recovery--we hired some more useless government workers, that's it.

RichardENixon's picture

Yep. I don't see how we avoid a massive crash starting January 2011.

Blue Water's picture

Blah Blah Blah.  Why waste time counting it when you could be spending more time printing it?

duncecap rack's picture

I like to read different opions sometimes. I often read Jon Nadler also even though I disagree with him 99% of the time.

Paul S.'s picture

Since when is the return of the citizen's expropriated capital considered an expense that contributes to the deficit?

DosZap's picture

Mad H F T,

You really see this happening?................how?

"The expiration of the Bush tax cuts next year and recovering economy will bring a return of tax revenues, eliminating 79% of this year’s deficit, even is Obama does nothing."

With the inordinate loss of Business, jobs, and taxes that go hand in hand with them, how does a RECOVERY occur?.

8 Million + jobs are gone, and forever..............no replacements.

Unless the Fuel taxes,internet taxes, national sales tax,or worse a VAT Tax..............or a combo of all of these happen I do not see increased demand, nor revenue streams large enough to make a dent..........

Plus, unless repealed,Obama Care is a Pandora's Box...........this PUPPY is FULL of yet undisclosed Hydrogen Bomb Economy Killers.

still kicking's picture

Add in the additional healthcare costs under Obamacare, a doubling of corporate and personal taxes with tax cuts expiring and you will find 10% (official) unemployment a fond memory.  Companies will not hesitate to lay off workers and opt for the $1,500 penalty a head on remaining workers they no longer offer healthcare too.  Prepare to watch tax revenue not actually increase and watch productivity plummet.  We are headed for 20% official unemployment and more of a reality of 35%.  Unlimited spending is a fool's game.

RichardENixon's picture

You forgot to mention the rush to unload stocks before the tax rate on capital gains and dividends goes up 1/1/2011.

pitz's picture

The bond market is never a bubble, even though its been going straight up for 30 years.

Meanwhile, if stocks have a couple days of +1% in a row, Zerohedgers are quick to call 'bubble', 'manipulation', and to throw insults out at anyone who would dare to buy a market that is only being 'traded by computers'.

(that was sarcasm in case you can't figure it out.....)

furieus's picture

Where is the chart?

Chumly's picture

hmmmm??? It's hanging up on the inside of a bathroom stall somewhere, waiting to be used as a toilet seat cover...

furieus's picture

Really... can anyone point me to the chart.  It's not on MHFT's website, and I didn't find it with a quick glance at ClusterStock either.  Thanks

MayIMommaDogFace2theBananaPatch's picture

Thanks furieus...

That probably comes pretty close to settling the notion about the reality of MFHT or at least the seriousness of the post.  Suspected by many...

ZEITGEIST's picture

it is freakin morons like you who convince other morons that hings are ok...you say Fannie and Freddie are a little..what proverbial cave did you crawl out from...try 2 to 3 trillion before said and done..and how how much off the books do you think the military industrial afucks are hiding....and oh ya how about the trillions in medicare medicaid and social security..who really are you MAD FUCKUP HEDGE GUY....AKA B BERNANKE..COME OUT OF THE CLOSET AND SHOW US YOUR REAL FACE...FREAKIN AHOLE FOR A MORON ....

CustomersMan's picture


One other factor NOT mentioned is the steady, relentless, Israeli Controlled push for a massive War with Iran. Is that going to disappear anytime soon.


Leave Iran the fuck alone.



Vampyroteuthis infernalis's picture

If we really want to get our fiscal house in order we would raise taxes and slash spending. It would be horrendously painful. Since no one has the political cajones to do such a move, this is what will occur. As the race to the bottom occurs worldwide, countries will start to default. Europe is up first followed quickly by Japan. China depends on Europe, Japan and the US to buy their junk. If no one buys Chinese products, China joins the rest of the dinosaur pack. All the US has to do is stay solvent longer than rest of the world. If our creditors go bankrupt, who do we owe money? No one. That is the name of the game.

ozziindaus's picture

If we really want to get our fiscal house in order we would raise taxes and slash spending

Personally, I would do the exact opposite to what you just stated. Less taxes and more productive spending. We are at 40-45% government spending to GDP which takes you to the extreme right side of the Rahn curve. More money spent by government is less in the private sector.

Too bad we can't trust the government to allocate money to useful sustainable ventures with any form of ROI. 

MayIMommaDogFace2theBananaPatch's picture

Too bad we can't trust the government to allocate money to useful sustainable ventures with any form of ROI. 

They thought you meant "RAW.."

blindman's picture

thanks for that,  i knew it was a matter of

leadership by evil genius that ends up

misallocating and misdirecting energy so

desperately that sanity is driven from the

room so as to save itself.

beware the full force of crazy making posts

and commentary.  



Gold Member's picture

In 2009, total federal tax revenue from personal income and corporate income was $1,051 billion.  So you are saying once the Bush tax cuts expire it will raise an addition $700 billion.  That is a nearly 67% tax increase in federal income taxes in one year.  Either you don't know math or you are stark raving mad.

LePetomane's picture

Well he thinks that the tax cuts will expire without anything being legislated to, at a bare minimum, partially take their place.

And everyone knows you shouldn't raise taxes when times are good much less during a recession.

Gold Member's picture

Raising taxes right now would be very bad for the economy.  Even if the government was able to steal twice as much in income tax, from $1.051 trillion to $2.102 trillion next year, that still would not be enough to cover the $1.3 trillion shortfall.  That's how deep a hole we are in.  The Bush tax cuts expiring will not raise anywhere close to the $700 billion he suggests. 

LePetomane's picture

No doubt, great hay be made over the extent and duration of prolonging a tax cut.  No one will dare suggest leaving nothing in their wake.

Chumly's picture

Objection!  MHFTs argument lacks foundation (Off the record your Honor - he appears to be an idiot of some sort).  We move to dismiss him as a commentator on ZH.

How do you refute such hollow jabber?  Don't bother.  I have half a suspicion the guy is yanking our strings - funny joke for some Friday humor, right? 

"...and to attempt to bring some clarity to readers who must be as befuddled as me..."

ha ha - sorry, but we are not as "befuddled" as you.


Donlast's picture

So why is Krugman paranoiac about austerity? 

Ned Zeppelin's picture

This post proves, yet again, that the "Mad" part of his name represents truth in advertising.

OldTrooper'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. 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%.

MHFT, do you really believe this tripe?  The 'causes' of deficits are spending more than you have.  What's going to change that?

You must have had a hard time keeping a straight face while writing this.

Jim in MN's picture

The bond market is telling us that the US can finance its interest payments as long as people keep buying USTs.  This is similar to the housing bubble: Homeowners can continue to cash out for leveraged flips on second homes and condos as long as house prices continue to rise.

Sounds great! 

Hrhmmmmm....what if the 'head of household' (that's me in my house and Obama in DC) acted prudently and used a more realistic long term rate of interest (like that which would naturally obtain under a gold standard, hands off you Fed ruffians!) when planning finance.....wonder what that would be like?  Maybe we would (gulp) borrow less or even (gasp) pay down debt and/or invest a penny here or there.....such radical thoughts.

There is a natural rate of interest, having to do with the real return on productive investment.  By messing with this natural rate for the past few decades, the bozos in DC/NY have brought all this to pass.  They should pay for it themselves (sell gov't assets like parks and aircraft carriers, take retroactive fines from Wall Street and war profiteers). 

Then, my dear mad hedge fund trader, mad hedge fund trading would be fun and properly profitable again.  This particular bond market should be firmly ignored as being as loony as the housing bubble; since it is nothing more than the policy-driven extension of the housing bubble.

Teaser's picture

Worst. Article. Ever.

And I have read ALL of Leo's garbage, so this is saying something.

I'd suggest some basic economics books to start, then examine some historical data.  Then, retract this worthless article.  You shouldn't be allowed near a computer, or money, whether it's your own or someone else's.

watmann's picture

Taxes and Government borrowings are essentially the same thing with the exception of the concept of transfers of funds form one source to another. The only thing that you need look at is the remaining disposable funds that each group has and if it is spent and what tractionable economic benefit is created. This is a $0 sum game. If we pull the funds form the consumer then retail consuption will fall unless its made up through credit extention from home mortgage financings or credit card line increases.


Where the situation magnifies itself is at the debt levels for both the Governement and individual. Entities that lend to these borrowers wnat to get paid back and they test that ability through a combination of asset and cash flow tests. Obvioulsy this is not a $0 sum game and the risks and costs of borrowing will change in this venue. when the risk of debt repayment rises then debt/leverage will disappear slowing the economy.


the last thing to recall is the amount of money that has to be repaid to the current bond holders. This will take a lot of the tax increase revenues to accomplish this. One must rememeber that we have already received the economic benefit from this past spending.


when you think about it it feels like a game

Reductio ad Absurdum's picture

And what happened to Franklin D. Roosevelt’s grandchildren, the last president to preside of massive, depression fighting government borrowing?

Jesus Christ you idiot. Don't you think World War II and the complete destruction of our economic competitors had something to do with the post World War II boom in the US economy? That boom was the only reason the government was able to pay off the ridiculous Roosevelt-era spending orgy. Furthermore, the government of that time period had borrowed from the American public, so that when the government repaid the money it went back into the American economy! Today the government is borrowing from China and Japan. If the government somehow repays the loans (which it won't), the money will go to China and Japan and will not help the US economy.

Coldsun's picture

Amen RaD.

The author should just apologize for voting for the current douche bag president (been a long line of them recently) instead of trying to crap out a re-donk-ulous spin of the current and coming economic clusterf*ck.

To madhedgefundtrader:
Please refrain from posting anymore of your delusions as the grown ups are talking. Next offense will result in 40 lashings; there will not be a 3rd offense as you will be sent to the Gulag (free healthcare!). You voted for it and I blame you for subjugating me to it. Man up, take responsibility for your recklessness, and apologize. My guess is that accountability and responsibility is not in your vocabulary (hope, change, and tyranny sure are though).

Government cannot solve all your problems no matter which party is in charge. The bigger the gov't, the smaller the personal liberties (economic participation as decided by the individual is a liberty).

RRA_223's picture

Remember, MHFT is talking about the DEFICIT:  yearly expendatures.


He is NOT talking about "DEBT" (cummulative) nor is he talking about yearly deficits 3-5 years from now.  The graphs will change - it's just a convenient snapshot in time to utilize while blaming Bush.


Do we really think a president that spends 400% more than Bush did (in his first year!), will get out of the hole when those Evil Tax Cuts expire and magically re-create all this revenue from businesses and individuals... who no longer work?   Nope.



HedgingInfiniteRiskIsNotPossible's picture

I think the only thing the bond market is telling us is that people are still craving safety. It sure as shit isn't telling us that the US deficit is going to somehow get under control, because that is less likely than me having a date with Gisele Bundchen.

covert's picture

not much. the interest is never enough to make up for inflation. there are too many optimists maybe? loansharking is destructive to the economy, but, is the only way to make lending profitable.

"never borrow, never lend, never make an enemy, never lose a friend." -william sharespeare.


MayIMommaDogFace2theBananaPatch's picture

Loan-sharking == usury == NOT APPLICABLE to banks

It's good to be the king

Dr. No'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%)"

This government-centric view drives me crazy.  It is not the governments money, it is our money.  Bush's cuts takes less money away from us.  The expireation of the cuts will result in more of our money going to the goverment.  Stop with the "government is loosing money" logic.  They dont have any money to begin with.  They have to take it from us.

tommus's picture

actually it's not your money, it's the FED's money.

they conjure it up from the void and let you play with it. 

they expect to get it back in the end, with interest!



HedgingInfiniteRiskIsNotPossible's picture

Agreed, but

loosing money

should be "losing money".

MayIMommaDogFace2theBananaPatch's picture

You are one of only 17 remaining people that can actually spell the various forms of this word, willfully and consistently, in the correct manner.

I don't know WTF it is with THIS particular word but it gets mispelled almost without fail.  Watch for it even in your 'favorite' mainstream publications.