In the absence of substantive measures to reduce the structural elements of the U.S. budget deficit, the U.S. debt burden will worsen. Investors are smart enough to recognize this, which means the time may not be far over the horizon when investors will focus more intensely on the U.S. situation and ask perhaps the most significant question of our age: If the U.S. is backing its financial system, who is backing the U.S.?
The global economy is messing up GDP and balance of payment accounting. Think about US companies building their factories in China, whose revenues are included in the Chinese GDP and whose exports from China are added in the Chinese current account.
For all the huge trade surplus that China is purportedly ‘enjoying’ it turns out that little benefit is being derived from it. Over 50% of China’s exports are produced by foreign corporations.
Uber-deflationista and bond bull Dave Rosenberg has this interesting piece of data in his “Breakfast with Dave” newsletter:
Have a look at the household balance sheet:
- Households own $18.2 trillion of residential real estate, even after the value destruction of the past three years.
- Households own $18.1 trillion of equities, despite the vicious bear market.
- Households own a near-record $7.7 trillion of deposits and cash — earning next to nothing in yield.
- Households own $4.6 trillion of consumer durable goods.
- Households own $3.5 trillion of corporate bonds and municipal/agency paper.
What do households own in Treasury notes and bonds? Try $800 billion.
It seems like we are really in Japan 2.0. With the exception that Japan 1.0, the original one, might actually blow up in the mean time.
Another stunning fact, courtesy of Gary Shilling
The article goes on making the bullish case for treasuries going forward as well, which I would not be so sure about.
The Fed is going to stop the music in March. There will be a scramble for the chairs. This is a huge experiment with no precedent. The entire developed world is the test subject. Risk assets will be subject to uncertainty. And markets hate uncertainty.
