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It's nearly time for the US CPI data again. It'll matter for roughly five minutes, maybe ten, then we'll move on to far more important things...
Let's quickly dispense with the expectations ahead of the US inflation data.
Cleveland Fed Nowcast expects headline inflation at 0.61% m/m and 5.19% y/y with core at 0.46% & 5.56% respectively.
Goldman analysts agree on the core inflation, mainly driven by housing and used cars again, although they see headline slightly lower than the Cleveland Fed model at 5.1% (but slightly higher than consensus at 5%) 👇
None Of This Matters!
I mean, it does, but unless there's a massive surprise, nothing is going to drastically change expectations on the inflation front.
It's still coming down, and barring a major shock, annual inflation will drop a lot over the next couple of months as these peak months drop out... 👇
Everyone already knows this. So where's the trading edge? It's too soon to say where it will settle. What new information could possibly come out of today's numbers to spur a new narrative?
A big miss on core inflation could break the 'sticky' prices narrative. Other than that, it's all noise.
There's far bigger stuff ahead...
The Debt Ceiling Narrative
Everyone knows that the debt ceiling will get resolved at the last minute.
HOW it gets resolved matters most. Which is why this caught my eye... 👇
As much as everyone wants to believe in 'free money' and a new era of higher spending, the opposite could also occur.
It would certainly help squash inflation if the fiscal spend wasn't quite so lavish...
Dan Clifton from Strategas explains the chart above:
Historically when net interest costs hit 14% of tax revenue, financial markets impose austerity on Washington. This is something that has not occurred in more than 30 years and is unfamiliar to most policymakers who had a free lunch for most of their careers
And a chart putting that into further context...
Now, it goes without saying that these forecasts aren't known for their accuracy. The UK was the most perfect recent example.
However, there is no (permanent) magic money tree, and the US is pushing towards that glass ceiling... 👇
DC: Last month the debt servicing cost increased a full 1% to 12.7% of tax revenues. Just a couple of months away from hitting 14%. As interest costs squeeze other spending, austerity kicks in. The debt ceiling is the opening course to what will be a longer period of austerity
But why austerity? We just want nice things and austerity is the antithesis of that...
DC: Federal spending is a full 5% of GDP above its historical average. Historically when federal spending exceeded its historical average, the debt ceiling (marked in yellow) was used to normalize spending.
This was true in the 80's, 90's and 2011.
Ah yeah, I guess that sort of explains why this isn't sustainable. Still, the economy's been booming so the higher tax revenues should cover it right? Nope 👇
DC: The first driver of debt servicing cost was the rise in interest rates.
We have now entered the second period which is less tax revenue. April tax revenues are already $200bn below CBO's end of the FY forecast following April's collapse
Jeez, Dan's a bit of a killjoy!
It seems like Congress can get started on this now and handle the issue in a manageable way or kick the can to have an even larger problem down the road. But the bill is coming due and its probably sooner rather than later
Check out Dan's thread here.
Now politics come into play. The next US election is only 18 months away (November 2024), so who wants to take the blame/responsibility?
Republicans for imposing fiscal discipline and causing recession?
Or democrats for keeping the spending taps wide open and causing/prolonging inflation?
A compromise will surely be reached, but where that agreement sits on the fiscal discipline spectrum will play a massive part in shaping the market view of the future for the largest economy in the world & therefore, the global economy.
Framing it a different way, post 2008, China took up the mantle and kept the global growth engine humming. If the US economy really slows, who does that this time?
Looking further out, Druckenmiller is banging the drum for entitlement cuts
And he's not talking about these damned entitled youths of today!
It's the exact opposite. Basically, the US keeps spending (and promising to spend more in future) on the seniors...
Druck: It is time that we let go of the false pretense that cutting entitlements is a choice. It is not. Either we cut them today or we will have to cut them much more tomorrow.
The US government 👇
With the Fed as chief facilitator... 👇
Not sure that 10y rates at 5% is the right benchmark, but the point is clear enough. Higher interest payments.
The US is far from alone in dealing with this ageing(inequality issue. But due to the sheer size of the population, it's the most noteworthy.
Others are ageing sooner, as in Europe (which is why pension systems are being reformed in France & Spain), and in China the demographic cliff looks even more drastic.
There's been much debate about this in the UK lately too, especially after the latest budget simply reinforced the existing trends... 👇
The Conservative party has no principle, no policy, no purpose except for taking money from workers and using it to buy the votes of boomers.
"A new anti-ageing therapy is causing Sima the lab rat to far outlive all the others in her scientific trial. What is this elixir of life?
The blood of the young, whose plasma infusions reinvigorate her ageing organs. The symbolism is too good to miss: older people sucking up the housing, wealth and incomes of young people will be wanting their blood next."
But sure, let's keep talking about Brexit...
Summing up, the more you focus on these demographic and policy trends, the more those previously 'accepted truths' will start to look a little less... truthful.
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