QE Black Hole

There will be $433 billion in US government debt issued from July to September 2019.  That is a run rate of $1.7 trillion in new US government debt per year.  That is the biggest pace of debt issuance ever.  No wonder the US economy is stronger than all the other developed economies.  The US fiscal stimulus is already massive, and yet, its not enough.  They want more.  Infrastructure.  Medicare for All.  Student debt loan forgiveness.  Universal basic income.  Tax cuts 2.0.  Bigger budgets. 

As the US population gets older, entitlement spending will go through the roof.  Even without the big increase in government spending, the trend in entitlement spending guaranteed a big increase in budget deficits.  But you have both.  That is a debt bomb.  And it will happen under either Republican or Democrat control. 

There is only one long term solution to fund these deficits.  No, not higher taxes.  Never higher taxes.   The populists who are now running the show will never accept higher taxes.  That leaves only one solution: 

Debt monetization.  Or the more common euphemistic term:  quantitative easing.  The only way to ensure ample liquidity while the US government sucks up most of it through its huge deficits is to cut interest rates and do QE.  That is the only way out.  You raise taxes at the end of the cycle like we are in right now and you are asking for a monster  recession. 

The White House and Congress are like the Fed:  they will do anything to mortgage the future, pull demand forward, in order to prevent a recession.  QE is where debt goes to die a silent and peaceful death.  There is no pain, only pleasure....if you have either 1) the reserve currency, or 2)ample current account surpluses.  If you have neither, you are a Turkey, or an Argentina.  Your currency crashes, there is rampant inflation, and financial chaos. 

The United States is turning into a gigantic banana republic, a country that relies on a reserve currency to maintain currency strength while running extremely loose fiscal policy and what will soon be extremely loose monetary policy.  If the dollar reserve currency status fades away, the US consumer will be in for a rude awakening. 

The big event for the week is the FOMC meeting tomorrow.  I am neutral on the outcome, as I expect Powell to cut 25 bps and be dovish, but that is what almost everyone else expects, so I don't expect any big moves.  There is a lot of easing priced into the Eurodollars futures curve, so it will be difficult for the front end to rally much on a dovish Powell, and there is a lot of room for the front end to selloff if Powell doesn't meet market expectations, which is unlikely, but a small possibility. 

So not much of an edge going into the FOMC meeting, but I do expect a sell the news reaction in the following days as other global equity markets continue to deteriorate (Monday it was Asia, today it is Europe) as the S&P 500 lingers near all time highs.  The tension is building, and the SPX is ready to blow.   

1-month returns:  SPX (black) +2.7%, Eurostoxx 50(blue) -0.4%, Emerging Markets ETF (EEM)(orange) -0.6%.