Notes From Underground

The rollout of the long-anticipated U.S. Treasury budget brought tears to my eyes. Why? Because it couldn’t help but wonder how supposedly intelligent people could present a politically ridiculous BUDGET and tax plan. The drafters lose the battle when they first present an increase in defense and make it a sacred cow of the Trump White House. You cut many social safety net programs while finding MONEY for questionable foreign entanglements and many unneeded weapons systems. The beauty of the original Bowles-Simpson plan was that all the sacred cows of the budget process were GORED. In my opinion real budget changes and reform must start with reining in the defense sector, but unfortunately too many Congressional districts are the recipients of defense spending and, of course, defense sector jobs. In a GREAT SANTELLI INTERVIEW Wednesday, former Senator Alan Simpson ripped apart the White House budget proposal and noted that it was sprinkled with fairy dust.

Simpson also agreed with Larry Summers, who referred to the GDP numbers as fantasy. The numbers used by the Trump Administration are subject to doubt. As Larry Summers wrote in his blog: “Then the administration asserts that it will propose revenue-neutral tax cuts, with the revenue neutrality coming on part because the tax cuts stimulate growth! This is an elementary double count. You cannot use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue. At least not in a world of logic.” My long-time readers are aware I frequently criticize Summers but this time I believe he has it right.

More importantly, the optics are the work of supremely naive policy makers. If the U.S. is ever to get tax reform and budget responsibility it begins with cutting defense spending. President Trump came into office with the desire of rolling back Pax Americana. In light of that promise this BUDGET PROPOSAL is a boondoggle. And the questions that this mysterious act of self-destruction from Mnuchin and his minions left me crying with 96 tears of exasperation from the stupidity that permeates our decision makers. AND YET THE U.S. STOCK MARKET RALLIED. Question mark and the Mysterians, indeed. But at the end of the day the global central banks’ policy decisions continue to elevate markets … and now the FOMC minutes.

***The May 2-3 FOMC minutes revealed that the FED would possibly begin shrinking its balance sheet by capping the amount of securities that would be reinvested as they mature. For example, if $60 billion of assets are maturing each month, then the FOMC may only reinvest $45 billion allowing for the balance sheet to shrink. There was nothing definitive revealed but in my example the process could be very long in duration. This suggests that the FOMC is very uncertain about its ability to undo the QE program. The market initially viewed the FOMC language as “hawkish” but as the headlines gave the markets some perspective as U.S. Treasury yields fell, the DOLLAR declined in value and GOLD rallied.

The decline in Treasury yields was reportedly driven in part by investor expectations of a somewhat slower pace of policy rate increases following FOMC communications after the March meeting and some WANING of INVESTOR OPTIMISM about the prospects for more expansionary fiscal policies” (hat tip to Bloomberg reporters, who annotate the minutes). If this is what the FOMC is watching, I would conjecture that with the Mnuchin Budget proposal the FED should be very cautious because the Congressional budget battle will slow down any sense of fiscal stimulus.

Also from the Minutes: “Concerns about the outcome of the French presidential election and tensions in the Korean peninsula pushed down 10-year sovereign yields in the advanced economies for several weeks.” Well, the FED and their analysis is really in trouble because yields on 10-YEAR notes are lower today than the May 3 FOMC meeting and outcomes to both noted events have been positive, which in FED thinking should have resulted in HIGHER yields.

Will this piece of data make the FED rethink a June rate increase, especially as the 2/10 yield curve is sitting at recent low flattening levels? Just something to watch in trying to comprehend the questions revolving around the mysterious budget propositions of the Trump economic policy team. It’s hard to wipe away the TEARS generated by such gross incompetence.

Tags: 10-year yield, 2/10 yield curve, budget proposal, Fed, FOMC, Trump Administration, U.S. Dollar

This entry was posted on May 24, 2017 at 6:33 pm and is filed under Fed, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.