Obama’s strategy to extricate the US from its dire economic straights has been leaking out from Washington over the past few weeks. Clearly, the nation’s capital is a place where there are no secrets. How does he wean the country off of massive stimulus programs, zero interest rates, and ballooning deficits?
The former community activist from Chicago intends to let the economy do the heavy lifting, bringing the budget deficit down from a suicidal 10.6% of GDP today to 3% of GDP, which can then be sustained indefinitely with a 3% real economic growth rate. Some 60% of this incredible shrinkage will be achieved through tax hikes, and 40% via spending cuts, which together will generate the needed $938 billion in savings. Here is the breakdown:
$331 billion-“bank responsibility fees” designed to address “too big to fail”
$252 billion-expiring Bush tax cuts for couples earning over $250,000 a year
$250 billion-scaling back the wars in Iran and Afghanistan
$105 billion-already announced spending freezes
I have a few problems with this scenario. This is obviously a “best case scenario” which leaves no room for error on any front. What if the economy doesn’t grow at 3%? My own long term growth forecast is 2.5%, and there are plenty of lesser ones out there. That creates a shortfall of $710 billion right there. What if interest rates go up? Double short term rates and the government’s debt service leaps from $385 billion to $770 billion. That’s a hole and a half. And what if the terrorists don’t cooperate with the reduce defense outlays?
Are Republicans going to cooperate on any of this? Only when Hell freezes over. If the Obama plan falls short of expectations, where will he go to raid the additional funds? At the top of the list will be a national VAT tax, savings squeezed out of health care through a reduction of services, and cut backs in entitlements. If you think health care generated unbearable noise coming out of Washington, you ain’t seen nuthin’ yet.
To me it all adds up to a collapse of the 30 year Treasury bond market (TBT). Funny, it seems that no matter where I focus my research, all roads lead to the TBT. Use this dip to re-establish longs, and set yourself up for your fourth round trip this year. And if you have the brass cajones that should be required before reading this letter, strap on more leverage by shorting the 30 Treasury bonds futures.
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 the “Today’s Radio Show” menu tab on the left on my home page.