Bonds!

[Dalal.Holdings]

On 5/19/2025 at 8:51 PM, wabuffo said:

I'm puzzled by the people who say we "need" 7% deficits in order to sustain full employment and our "wonderful" 2-3% GDP growth we've been having.

 

I don't know if 7% is the right level - but the answer is that the USA is the reserve currency issuer in a world where the US is no longer running a fixed exchange monetary regime.  As such the US must run a deficit large enough to take care of both domestic and foreign demand for US safe monetary assets (ie, Treasuries, but also reserves and currency in circulation).

 

The US fiscal deficit = private sector surplus (savings) = domestic surplus + foreign surplus (ie, trade deficit).

 

Look what happened when the US Treasury ran a surplus in 1998-2001 just as China entered the WTO in 2001 and the US trade deficit exploded.   The US domestic private sector was forced into a deficit (ie - increase debt to maintain consumption).   Debt rose (mostly mortgage debt but other forms of consumer debt also) until it was no longer sustainable and the US experienced a debt panic in 2008.   (BTW - this mirrors the problem under a gold standard fixed exchange monetary regime where monetary assets were constrained to the rate of new gold supply entering the system - and the US would suffer a debt-panic/depression every decade or so just like the GFC - except there was no big fiscal response in those days).

 

It then took a decade (to 2019) of fiscal deficits to repair US domestic household (and business) balance sheets.  Then 2020 and the pandemic happened and the US Treasury rained cash on the domestic sector.   This accidental pushing of deficits to high levels produced a domestic sector that emerged from the pandemic in its best financial shape in over 70 years!   That's why I was so bullish on the US economy even as the Fed hiked 500bps starting in 2022 (and mostly remain bullish for the decade of the 2020s - tariffs being the wild card).

 

 

 

You may not like it - but this is what peak performance looks like. lol.

 

You want to run deficits back to 2-3% of GDP?  You then have to describe how the sectoral balances reset when the trade deficit is still sucking out the equivalent of 4% of US GDP in terms of US monetary safe assets created by the US Treasury.

 

I maintain that you have to place US deficits in the context of, not US GDP, but global GDP because of the USD as a global reserve currency.  So current deficits are a bit less than 2% of global GDP ($114T) at the moment.   What is the right level for US deficits as a % of GDP?  I don't know - but what I do know is that 2-3% is too low.   Maybe 7% is too high, maybe it isn't - I don't know.  But that should be the question - what is the optimal level to try to target, I say.  And I would also say - abandon the old paradigms of a fixed exchange monetary regime like when the US dollar was subordinated/pegged to gold.   We've seen that movie in modern times and it led to the GFC.

 

Bill

 

 

There is a lot of fixation again on a single sample set -- the 2000-2008 period to draw wild conclusions about a topic as gargantuan as fiscal deficits.

 

As to your simple equation:

 

The US fiscal deficit = private sector surplus (savings) = domestic surplus + foreign surplus (ie, trade deficit)

 

So one can shrink the trade deficit (via trade barriers), shrink the fiscal deficit, and still maintain the same domestic surplus (e.g. if x = y + z, z and x can both shrink and y can remain the same).

 

We can go around saying the U.S. is the reserve currency and backed by the strongest military so it needs to generate large deficits until one day that changes--and if the U.S. shuts down its factories and can't make ships or planes anymore, that "strongest military" aspect will change

 

The bond market doesn't seem to be playing along

 

https://www.bloomberg.com/news/articles/2025-05-20/stock-market-today-dow-s-p-live-updates?srnd=phx-markets

 

Quote

Treasuries got hit after a weak auction of 20-year bonds, whose 5% coupon rate was the highest since the tenor was reintroduced in 2020. Long-term debt bore the brunt of the selling, with 30-year yields jumping 11 basis points toward the highest since October 2023. After almost erasing losses, the S&P 500 dropped over 1.5%. The greenback slipped against most major currencies. Bitcoin pared its advance, but was still set for a record.

 

 

Edited May 21, 2025 by Dalal.Holdings

[hasilp89]

@gfp 20 year at 5%+, you a buyer?

[gfp]

7 minutes ago, hasilp89 said:

@gfp 20 year at 5%+, you a buyer?

 

And a couple fills on ZROZ as well

Edited May 21, 2025 by gfp

[Dalal.Holdings]

1 minute ago, gfp said:

 

Why tho ? Is the extra 80 bp off short term T-bills worth it ?

[Blake Hampton]

I honestly don't see what's wrong here, but the market obviously didn't like it:

 

 

[Blake Hampton]

Oh and:

 

[james22]

 

[Junior R]

13 minutes ago, james22 said:

 

lol good post its true can easily lock in some 2, 5 , 10 year bonds and call it a day lol

[Dalal.Holdings]

1 hour ago, james22 said:

 

 

Don't forget -- they're getting tax cuts on their social security checks too! The rest of us will be lucky to get any social security at all !

[Dalal.Holdings]

So on the long end rates blowing out...it's said that it's not yield curve inversions that cause recessions, but the re-steepening of the curve. I guess if this continues, we'll find out. 

[Blake Hampton]

8 minutes ago, Dalal.Holdings said:

Don't forget -- they're getting tax cuts on their social security checks too! The rest of us will be lucky to get any social security at all !

 

Oh, no doubt it'll still be around.

 

I'm 23 now, so by the time I'm eligible at 90, I'm sure my monthly check will be enough to buy a nice Snickers bar.

[gfp]

23 minutes ago, Blake Hampton said:

 

Oh, no doubt it'll still be around.

 

I'm 23 now, so by the time I'm eligible at 90, I'm sure my monthly check will be enough to buy a nice Snickers bar.

 

Well if you really believe that social security won't be adequately providing for you in retirement, there is no time like the present to start buying attractive equities for the long term so you don't have to rely on the social safety net to fund your older years.  Your biggest advantages are the amount of time you have in front of you to let your capital compound in attractive investments and the small size of your investable funds opening up everything but high net worth restricted products for you to consider for investment.  You can buy tiny companies like Tim Eriksen, you can buy long term compounders like dealraker, you can trade around deep value situations like Sanjeev, you can buy undervalued trophy assets with long term inflation hedges built in like Greg.  You could even stoop to the lazy level of buying 50% each in the two companies named in this website title and still have more than enough for your retirement as long as you get started while you are still very young.  Don't squander your only two advantages.  Time and size.  Trust me, your experience level isn't one.

 

Blake - it says you joined this forum in February 2023.  The message board is all about Fairfax.  We talk about it all the time.  Over those years was Fairfax overvalued or unattractive to you for some reason?

 

Edited May 21, 2025 by gfp

[james22]

10 minutes ago, Blake Hampton said:

I'm 23 now . . .

 

You'll live better than any generation in history.

[TwoCitiesCapital]

2 minutes ago, james22 said:

 

You'll live better than any generation in history.

 

That's what we told the last generation. It wasn't true. 

[james22]

Just now, TwoCitiesCapital said:

That's what we told the last generation. It wasn't true. 

 

Really?

 

How many of them would give up the Internet alone for any amount of money?

[TwoCitiesCapital]

6 minutes ago, james22 said:

 

Really?

 

How many of them would give up the Internet alone for any amount of money?

 

Yes! Congratulations!

 

There aren't enough jobs that pay enough for you to service the student loans we told you to get, or to buy a home, but congrats! You have YouTube! 

[james22]

5 minutes ago, TwoCitiesCapital said:

Yes!

 

Not one.

[Malmqky]

Ya know, with all this macro talk and quoting Buffett and Dimon, I figured I’d toss this one out @Blake Hampton. I’m sure you’ve read it before, but;

 

“I don’t think about the macro stuff. You know, I just – the important – what you really want to do in investments is figure out what’s important and knowable. If it’s unimportant or unknowable, you forget about it. What you talk about is important but, in my view, it is not knowable. Understanding Coca-Cola is knowable or Wrigley or Eastman Kodak or anything. You can understand those businesses. That’s knowable. And whether it turns out to be important depends on where your valuation leads you and the current price and all of that.

 

But we have never either bought a business or not bought a business because of any macro feeling of any kind. We don’t read things about – predictions about interest rates or business or anything like that – because it doesn’t make any difference. I mean, let’s say in 1972 when we bought See’s Candy, I think, maybe, Nixon put on the price controls a little bit later – let’s say we’d seen it. But so what. We’d have missed a chance to buy something for $25 million that is earning $60 million pre-tax now. We don’t want to pass up the chance to do something intelligent because of some prediction about something that we’re no good on anyway. So we don’t read or listen to or do anything in relation to macro factors at all. Zero.“

 

[Spekulatius]

I wonder at which point Trump is going to come in and state that these high treasury yields are a bad deal for America and this needs to be fixed with a restructuring. Whatever happens after this will be blamed on Biden and Powell.

 

Bessent will explain this thing while in incessantly shaking his head while talking.

Edited May 22, 2025 by Spekulatius

[Dalal.Holdings]

https://www.wsj.com/finance/investing/the-deficit-is-unsettling-bond-traders-heres-what-that-means-for-the-economy-619614b3?st=JJaBU2&reflink=article_copyURL_share

 

Quote

Treasury Secretary Scott Bessent has stressed his focus on keeping the 10-year Treasury yield down given how many corporate and consumer borrowing costs are tied to longer-dated yields

 

Great work, Scott

 

They can try to blame their predecessors all they want, but with all the major economic moves they’ve made just a few months into their term, Trump and Bessent (and Rs in Congress) own this economy now as far as the electorate is concerned. No one will buy blaming Biden or Yellen now. 

 

 

Edited May 22, 2025 by Dalal.Holdings

[Gregmal]

+1 @Malmqky and @gfp

 

Plus Id add….at that age, WTF do you have to lose in the first place? Unless it’s a unique situation, say an inheritance or something, what do you even have to worry about? Having a 30% drawdown on $40k?
 

Even amongst some friends I have, mid 30s and 40s…if you have under $1m just keep working and investing. You’re kidding yourself thinking some internal genius of yours(that still has you stuck at a desk BTW) is gonna trade yourself into a faster retirement than just being patient and long term focused. Also easier than constantly fretting losing money you don’t need or preparing for the end of times.
 

My general “not advice” suggestion is to take the first $50k and get yourself in a home that’s gonna be sufficient for 10-15 years. Still doable today, even if it’s with PMI. Then just collect assets and invest relentlessly. 

[Dalal.Holdings]

Quote

Figures from the Congressional Budget Office, a nonpartisan referee, forecast that the GOP tax bill would push deficits to around 7% of gross domestic product in the coming years, an unprecedented amount of borrowing for a peacetime economy with a low unemployment rate.

 

I wouldn’t try to hand wave this crazy fact

 

And the deficits will widen even further if the U.S. enters a downturn…absolutely ludicrous

 

Edited May 22, 2025 by Dalal.Holdings

[Spekulatius]

Current situation reminds me more and more of Liz Truss mini budget:

https://www.crfb.org/blogs/americas-truss-moment

[Dalal.Holdings]

Man, it’s a good thing these “small government” Republicans are in charge now

 

 

 

 

[wabuffo]

The 20-year bond is a weird instrument - not sure who the natural buyer is for it (unlike the 10-year and 30-year).  They only auction it every 3 months as opposed to the 10-year and 30-year which are auctioned every month.  And those two auctions went great a couple of weeks ago.

 

I'd hesitate to draw too much from one 20-year auction.

 

I would also point out that the inflation expectations in the 10-year have hardly moved.  It looks more and more like the 10-year yield hovers around 4.5% unless there is a growth scare when it drops in yield (like the summer of 2024 or the tariff liberation day).

 

Bill