The “Sell America” movement is flailing around and not working as it was supposed to

The “Sell America” movement is flailing around and not working as it was supposed to. The stock market might be iffy around the edges and the dollar is down, but the 30-year yield is high and diverging from the dollar, as the Bloomberg chart shows. We see the same thing in the dollar index vs. the 10-year—a rare divergence.

It could be due to being short all those things has a carry cost that gets too burdensome, as Brent Donnelly points out. Let’s just note that the correlation of the dollar and the 10-year is pretty good over many, many years. It’s not 100% but the correlation tightens in times of turmoil—except not this time.

Today’s auction of 20-years ($16 billion) will be interesting now that the third and final ratings agency has cut the US from Triple A. As noted before, some investment managers are required to eschew anything that is not Triple A, although nobody can name how many and how much they have to dump. Note the 20-year is already back over 5%.

Attention is already turning to next week’s inflation report. Atlanta Fed Bostic said “US businesses may have run out of strategies to delay changing prices or employment in response to higher import taxes and the economy could soon face a wave of price increases. ‘If these pre-tariff strategies have run their course, we're about to see some changes in prices, and then we're going to learn how consumers are going to respond to that.’” In other words, the classic higher prices and empty shelves.

Reuters goes on: “Another Fed interest rate cut is now not fully priced into futures markets until October.” It’s using some method other than the CME FedWatch tool, which continues to see a 51% probability a cut in Sept and a 75.6% chance of two cuts by the October meeting.

About the upcoming PCE next week (May 30): the data will be for April, so too early to show tariff effects. But as economist Krugman points out, “the average U.S. tariff rate stands at 17.8 percent, up 15 points from its pre-Trump level. Since imports of goods are more than 11 percent of GDP, that’s a big shock to consumer prices. And no, foreigners won’t pay the tariffs.”

Yes, it’s not impossible that the splendid US economy will absorb it as one-time thing. But for that to come about, the next policies need to to be intelligent and responsible. Krugman laughs, and rightly.

“What we’re actually going to get are the three Ds: denial, dirigisme and deception.” TreasSec Bessent has already boasted the Trump bought down gas prices. Well, no. For one thing, gas prices are higher than when T took office. For another, the causes of oil price moves are far bigger than Trump’s offer of ending sanctions on Iran.

The second thing is dirigisme, a French word connoting government interference in the private sector. We’ll leave it there. It’s the third thing that has economists quaking in their boots—interference in the Bureau of Labor Statistics. The former BLS head said everyone there is worried about getting fired for numbers that Trump doesn’t like. “The bottom line is that the direct economic consequences of Trump’s tariffs will surely be bad, but his unwillingness to accept the reality of those consequences will probably make them considerably worse.” (Remember that The Economist and FT have published alarmist articles about crummy data because of staff cutbacks.)

Krugman is making a partly political judgment but it is in keeping with everything we know so far about Trump’s mindset and proclivities.

What we want to know is how big a rise in PCE will it take to spook the bond gang and bring forth the “term premium” again—the compensation to fixed income investors for expected inflation? The consensus forecast for May is a mostly unchanged 2.5% for headline and a small rise to 2.7% for core. The Cleveland FED has a gain to 2.38% for headline (from 2.23%) and 2.73% for core (from 2.6%). This is not enough, probably, to set hair on fire. But stay tuned. Thousands of economists forecasting inflation can’t be wrong (can they?)

Forecast

It seem seems as though the Moody’s rating downgrade is a minor event but combined with other negatives like ongoing nonsense out of Washington, including the fiscal mess, it carries some weight.  The 20-year auction today could be interesting.

Normally we expect a pullback on position-squaring on the Friday before a big US holiday on Monday. But we can’t count on Trump to keep his mouth shut for that long and we will likely get the fiscal vote this week. It’s having more effect than usual. We say stick with the flow we already have.

Tidbit: Jared Bernstein (Substack), who was Biden’s chief economist, has a dandy piece on what sovereign debt at “unsustainable” levels really means. Citing various economists, he boils it down to the growth rate being less than the long-term interest rate (aka yield). When growth is higher, the country is okay. When growth is lower (“g < r”), it’s not. This is what unseated Britain’s Liz Truss.

[The proposed budget will add $6 trillion to the deficit over ten years. The current deficit is $36.2 trillion. The rate of increase is 17% or 1.7% per annum. Things don’t always develop in a straight line as neatly as that, but the implication is that the US economy has to have a real growth rate of 1.7% to break even, so to speak. With inflation at (say) 2.5%, that means a nominal growth rate of 4.20%. We did have growth rates over 4% in the 1950’s and 1960’s, but not since then. This is our own take, not Bernstein’s.]

So, if we like the Goldman forecast of growth this year at 3.2% nominal, which is 1% real (after inflation), then growth will be far less than rates.  Tariffs lower growth and deficits raise rates. The WSJ says rates could be “more elastic to the deficit than it’s been in the past.” (Presumably because of the US’ exceptional privilege.)

Another drawback: cutting taxes for the rich while unemployment rises worsens the deficit and has a knock-on effect causing more unemployment. Historically, it’s very rare for unemployment to fall while the deficit is rising.

Why does this not mean rising yields, especially given the coming inflation? We admit to not understand the reasoning of the bond market. But it seems that stagflation  means the real return has to be higher to induce investors to enter or stay in the US bond market. So far the compensation for inflation—term premium—is nowhere to be seen. The implication is that we either have it wrong or the bond market is in for one hell of a shock.

Tidbit: One more note indicating Trump is racist and cruel—he proposes using foreign aid fund authorized by Congress to send back home the Haitian and Ukrainian refugees in the US as victims of disorder and danger at home. Again, he is usurping Congress’ power of the purse and it sure seems illegal, but that doesn’t mean he won’t get away with it. He’s the one who falsely said during the campaign that Haitians are eating neighbors’ cats and dogs.

Various tourist organizations report that travel to the US has fallen off dramatically since Trump took office. The net loss will be on the order of $12.5 billion for the year or maybe more (Newsweek). You can bet black people will not be visiting from anywhere lest they get grabbed off the street. 

Tidbit: See the Reuters/Ipsos recent poll results. It’s very troublesome that the on the economy, 94% of Dems disapprove of Trumps’ performance, but only 12% of Republicans. As for cost of living, 96% disapprove of Trump policies while only 20% of Republicans disapprove. Is this income inequality at work? Whatever it is, divided we fall. 

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