Market Pulse: Spending Like Drunken Sailors
In 3 minutes, understand exactly why the market is so worried about US government spending.
In 3 minutes, understand exactly why the market is so worried about US government spending.
Two months ago, JP Morgan’s CEO Jamie Dimon said in a major finance conference that the US government has “been spending money like drunken sailors around the world”. Two weeks ago, legendary investor Stanley Drunkenmiller went on CNBC and echoed Dimon’s sentiment with the same words.
“We are spending like drunken sailors”
Then, last week, Moody’s followed Fitch’s lead and downgraded the US government’s debt rating outlook from “stable” to “negative” (Fitch first downgraded US debt back in August).
Meanwhile, the Federal government continues to deny that government spending has been a little out of control.
“Moody’s decision to change the U.S. outlook is yet another consequence of congressional Republican extremism and dysfunction,” White House press secretary Karine Jean-Pierre said in a statement.
The Big Issue right now is that the private sector thinks the US government is spending too much, which is causing long-term rates to go up, and the market is paying more attention to US Treasury debt issuance announcements than even inflation reports!
Last week, the US Treasury’s Quarterly Refunding announcement actually moved markets and it made headlines. Who’s ever heard of Quarterly Refunding announcements until now? 😂 The announcement signaled that the Treasury was issuing less debt than expected and the markets went up 📈
With the US involved in two major foreign wars and Congress in turmoil, US government debt issuance suddenly deeply matters to the market.
The Details
US long-term interest rates are up
The US 30-year Treasury Bond is synonymous with US long-term debt and interest rates for it have been sky rocketing. This is not good. This means that global demand for 30-year Treasury bonds is falling while the US is spending hundreds of billions of dollars on foreign wars.
The first time long-term interest rates soared in 2022, regional banks imploded. Now long-term interest rates are soaring again and the banking sector is at risk of another balance sheet crisis. Banks own a lot of long-term debt.
Soaring 30-year bond yields is also causing 30-year mortgage rates to soar (up to 8% recently!), increasing stress on the housing market.
Total US government debt is soaring
Total US government debt and interest rate payments are soaring. Total US debt stands at almost $34 trillion today and in September, it increased by almost $275 billion in one day! At the same time, Biden is asking Congress for hundreds of billions of extra dollars to fund foreign wars.
“Biden administration seeks $105 billion in national security package” - CNN headline in October
At the same time, with US debt interest rates soaring, the new debt being issued to fund all the new spending is costing a lot! This is not sustainable. No wonder the markets are worried.
The private sector’s war on US government spending
It’s no coincidence that legendary investor Drunkenmiller is echoing legendary banker Jamie Dimon.
“We are spending like drunken sailors”
Speaking of coincidences, I’ll end the newsletter with a small tip. Did you know that Fitch’s downgrade of US long-term debt earlier this year from AAA to AA+ happened at the same S&P 500 level as when the Fed started raising interest rates in March 2022?
This started a large decline in the S&P 500 from almost 4,600 to 4,100 in 3 months. Coincidence? It’s hard to say, but the numbers align so well. Now, Moody is downgrading too.