S2N Spotlight
It has been a very draining week, so I am going to make this relatively brief.
What is a bond? A bond is when someone or some entity borrows money from a lender and agrees to pay interest at an appropriate rate for a period of time and then repay the loan. There are 2 main factors a lender needs to consider when making a loan. First, what is the probability of getting paid interest and my capital back at the end of the period? Second consideration: What is inflation likely to do to the value of the currency I am lending? Obviously the longer the period of the loan, the greater the uncertainty, which is why most loan term structures have an upward-sloping curve.
We are going to focus on the government as the borrower. Why does a government need to borrow money?
Well, it is quite simple: when you spend more than you earn, you need to either sell assets or borrow money to fund the shortfall. It has been 23 years since the last surplus; the current deficit is over $2 trillion a year.
The next chart is quite busy, but I wanted to pack as much into one chart as possible. Stay with me. The blue line is the total federal debt; its over $35 trilly. Gone are the billy days. If you are new to my sarcasm, a trilly is none other than a trillion dollars, or $1,000,000,000,000. The rate of debt growth has been quite spectacular; a pandemic didn’t help. Time is running out on $125 billion of fraudulent jobless claims from the hurried $900 billion jobless benefits scheme rushed through Congress in 2020.
Michael, stay focused; no more tangents.
I just realised that the labelling of the red interest payments on the debt didn’t come out, and I am running out of time, so take my word for it: the interest on debt is more than $1 trillion. The green dotted line shows the percentage of total government receipts from taxes that is being spent on debt interest. It is currently sitting at 35%. More than a third of the government’s income is being spent on debt servicing.
There is an interesting thing called a debt ceiling that is the government’s way of trying to cap Congress from going crazy on the spending. The problem is every few years there is a big political fight, and then the ceiling gets raised. To make things a little more comfortable, they suspended the debt ceiling for a few years because it was kind of getting tedious negotiating a new level every 6 months. Well, the debt ceiling is no longer suspended this year, so expect some fireworks and more borrowing from the government.
The more you borrow, the more you need to find lenders. When there is an oversupply of borrowers, lenders usually charge more. When more money is introduced into circulation via borrowing, it usually leads to inflation unless productivity is able to make up for the growth in the money supply. To be continued.
S2N Observations
My mother reads every letter I write and usually responds with some words of encouragement. Yesterday she responded, “You are a dirty old man.” Mom, this is for you.
Front and centre of the news over the last 24 hours, you have 2 of the world’s biggest swinging dicks launching rockets into space. You have the 2 wealthiest men in the world engaged in a pissing contest. Do you get any more phallic than that? Or is that just my penis envy? Thankfully there was no crew onboard SpaceX’s spacecraft.
Another point of interest is the amount of money the banks are making. The 6 largest banks in the US made over $100 billion. Unlike many of the high-profile tech companies making their founders instant billionaires, these banks actually make money. Can you imagine the bonuses Wall Street is about to dish out?
S2N Screener Alerts
Gold has a nice 2-sigma up day.
The Mexican Peso versus the Euro had a -2 sigma day. If you asked me, this chart looks like it is about to fall out of bed.
Performance Review
For those who are new to the letter, the shading is Z-Score adjusted so that only moves bigger than usual for the symbol are highlighted.