Oct

19

They say the market is upset about the jump in bond yields but maybe she's anticipating a premature return to socialism

Stefan Jovanovich writes: 

If I thought there was any reliable direct connection between elections and speculations, I would be tempted to join LW and you other clever traders and bet my "system" - which does better than average at guessing political horse races. I don't because, if there were any such link, I would not be able to pretend to be an expert in such company. You guys would already know the odds down to the precinct levels if that mattered.

I think, in fact, you all do know what matters regarding politics and money. Now that I am 60% of the way through the House "swing" districts, I are learning what the markets have already predicted: Jim Jordan is going to be the new Speaker of the House of Representatives. When that happens, the Federal budget and the Treasury's operations are going to be subject to the approval of the 21st century successor to John Sherman; and the shock is going to be that the national debt will be brought home. The taxpayers are going to become the Federal bond holders just as they did during and after the Civil War; and they are going to want tariffs and "sound" money to protect their investments, even as Confederate paper (aka Chicago municipal bonds) is allowed to evaporate.

Larry Williams writes: 

If the new speaker shrinks debt stocks will get hit hard. Deficits are very bullish for equities.

Alex Forshaw asks: 

Larry, why do you say that/how do you strip out correlation vs causation in this? The blowoff 1998-2000 top occurred among budget surplus and deficits are inherently counter cyclical i.e. generally low in late cycle/high in early cycle (deficit as % of GDP biggest in 1981-83, during/after 2 recessions or 1 severe recession; 1991-93 after a fairly deep recession; 2002-03 after a recession; 2009-10 after a severe recession.) To the extent that the deficit is high adjusted for its place in the economic cycle (2012, 2018 ytd) it doesn't seem bullish. To the extent that deficits are unusually low cyclically adjusted (late 90s, 2007 arguably, 2015 arguably) it definitely does not seem bearish. 

Larry Williams replies: 

I don't think it is correlation but causation. Large deficits means lots of money floating around the hood. That translates to expansion, building–which translates to jobs, and that to consumer spending, and that to corporate profits. I'm traveling so lack data. The "one and only" Mr Vince may wade into this with data.

Ralph Vince responds: 

25+ years ago I bought the Commerce Dept Database of 900 data items, and set u p a program (that would take two months to run, with a math coprocessor no less!) to examine each pairwise data set, and for each pairwise data set, to skew them +12/9/6/3/0…/-12 months, and record only those dataskew pairs with absolute value of correlation > some value (I forget which, but it was quite high).

One of the (many) dataskew pairs that filtered through very highly was that of federal deficits and economic growth (and broadly, we can stipulate that ROC of economic growth correlates to equity returns). The greater the deficits, the greater the market gains.

There were periods that did not fit this pattern, of course, it was not absolute (one out-of-sample period being the Robt Rubin era which was yet to transpire).

My guess is like the Senator's here; greater money floating around menas greater economic activity. I think it;s even a deeper causation than that. I would define it by saying that debt needs be repayed only once (if ever, it can also be perpetually rolled — the "problematic" nature of this is solely a function of rates. If manageable due to rates, it is virtually nothing. Further, even if rates become problematic, the yield curve itself provides an avenue of release — cue Rubin again), whereas the borrowed dollar can circulate multiple times.

So there is the multiplier effect of borrowed money vs the borrower's asset which is a one-time shot

If it weren't for borrowing, in particular the fractional banking system, we'd be in the year 1,000.


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