There is a distinct theme for this edition of Market Forces and it’s the health of the U.S. government balance sheet and, by extension, the value of the U.S. dollar and gold. Concerns about U.S. debt are nothing new but pandemic-era fiscal spending is causing a relatively novel and rapid deterioration of government finances. For diversion, we have a list of the top 100 TV episodes of the century and as always we’ll look ahead to important economic data releases.
Precious metals
A different playbook
Gold is not playing by the usual rules according to Morgan Stanley Wealth Management chief investment officer Lisa Shalett. This might indicate volatility ahead.
Bullion prices are sharply higher year to date, setting records, but Ms. Shalett notes that “the impressive move has defied historical correlations.” Under normal circumstances, gold moves higher as the U.S. dollar falls, inflation pressures moderate, and inflation-adjusted interest rates climb. None of these conditions are being met now.
The strategist has a threefold hypothesis for the ongoing gold rally. One, geopolitical concerns in eastern Europe and the Middle East. Second, and more alarmingly, global investors are getting concerned about the sustainability of U.S. deficit spending, and are diversifying away from greenbacks.
The third reason is a growing suspicion that inflation is set for a comeback as U.S. economic growth remains robust (much robust-er than Canada’s).
Geopolitical tension is hopefully temporary and the Federal Reserve has tools to tackle inflation pressures if they arise. The federal deficit, on the other hand, is not a problem easily addressed and it might be the case that the political will to cut spending doesn’t exist.
Treasuries
10 reasons to worry about the U.S. dollar
There is something about getting older that makes people start worrying that government debt is about to collapse the U.S. dollar and the global economy and apparently I’ve reached that stage. It’s a package deal along with lower back pain and the inability to drive at night.
The source of my disquiet is a late summer post by Torsten Slok innocuously titled 10 Facts about the U.S. Treasury Market (hat tip to the Financial Times’ Gillian Tett for the find). It starts with the fact that U.S. government debt is set increase from 100 per cent to 200 per cent of GDP. A time frame was not provided but the Congressional Budget Office projects this dubious target will be reached in about 20 years at the current pace.
Next is that U.S. federal deficits are expected to be more than US$1-trillion every year for the next decade.
The next one is this notice that really got me worrying: “US$9-trillion of government debt will mature in the next 12 months.” At first I thought this was global - but unfortunately no, this is U.S. alone.
Facts number four and five concern rising pension buying of bonds and a reduction in China’s holdings of Treasuries, neither of which worry me much. Number six is that the weighted average maturity of U.S. government debt is six years, which sounds low to me – shorter maturities can cause liquidity issues.
Number seven, T-bills are a larger share of total debt, is not a surprise. Number eight is that Treasury auctions this year are on average 27 per cent larger than last year. That’s a lot for the market to digest.
Number nine is that debt service costs are now 12 per cent of U.S. government outlays and number ten quantifies this: daily interest payments have doubled to US$2-billion per day since the pandemic.
I don’t know what to do with this information except buy some gold bullion. I’m reasonably certain the U.S. dollar will not collapse but if it does we’ll have bigger problems than our investment portfolios. The upheaval will be familiar to fans of The Road and Station Eleven (a great book by Canadian author Emily St John Mandel, by the way).
Mr. Slok suggests that investors watch for weak Treasury auctions indicating demand is insufficient for supply, a credit downgrade, and a steepening yield curve that implies investors want more returns for longer term issues to compensate for excess risk.
Diversions
The best of television
I started reading Bill Simmons in the early 2000s because his ESPN column was right next to Hunter S. Thomson’s blatant cash grab of a drug-addled football column. Mr. Simmons moved up quickly in ESPN, was given his own site within ESPN, Grantland, before he got mad at his employer, left, and founded The Ringer.
He doesn’t write anymore, which is regrettable, but I spend a lot of time with Ringer podcasts The Watch and Rewatchables in particular.
I don’t look for reading material there very often but I should start because I just found the highly entertaining 100 Best TV Episodes of the Century. I’ve only seen seven of the top 20 so have some watching to do. No one can make me watch Jersey Shore though.
The essentials
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Globe Investor highlights
Further to my concerns expressed above: Jamie McGeever of Reuters reports on how the relationship between U.S. Treasury yields and the oil price have broken down, suggesting that the near-term inflation outlook has taken a back seat to long-term deficit fears in the bond market.
Bearish bets against the TSX 60 have nosedived over the past year, reports Larry MacDonald, who breaks down the most heavily shorted stocks this month.
Scotiabank’s chief economist Jean-François Perrault thinks housing prices are headed for significant gains next year and believes Ottawa’s reduction in the number of permanent residents probably wasn’t the right move for the country.
Hugh Smith of the London Stock Exchange Group did some stock screening to turn up eight stocks that could offer a pleasant earnings season surprise
What’s up next
Canadian GDP growth estimates for August will be reported on Thursday - a month over month increase of 0.1 per cent is expected. The S&P Global Canada Manufacturing PMI for October will be released Friday. International merchandise trade data is out November 5th. Domestic job numbers won’t be reported until Nov. 8.
It’s a big data week for the Americans. GDP for the third quarter on Wednesday showed 2.8 per cent annualized growth, modestly lower than the consensus expectation - as well as the previous quarter’s reading - of 3 per cent. The employment cost index, an important inflation indicator, is out Thursday.
Non-farm payrolls will be released Friday - 120,000 new jobs is the consensus forecast – along with the unemployment rate. ISM Manufacturing PMI for October is also out Friday and a contractionary 47.6 reading is the consensus estimate. ISM Services, more important for the U.S. economy but less correlated with S&P 500 profit growth, is published Nov. 5.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)