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10Y tax reform Trump

Wall Street Warns Of ‘Supply Floodgate’ As Trump’s Tax Bill Balloons Deficit

So when you hear conspiracy theories about upwardly revised projections with regard to Treasury supply, just know that there is no conspiracy. There is just reality. And the reality is this...

Do you know what Wall Street did on Friday? Well, let me tell you.

They set out to scapegoat Donald Trump for a projected increase in the U.S. deficit, that’s what they did.

That’s according to some folks who swear to Christ that everything – everything, I tell you! – is a conspiracy designed to undermine the presidency.

 

And I’m serious, there are people out there today literally suggesting that Wall Street is now engaged in a meritless (and thereby deliberately nefarious) attempt to blame Trump for the ballooning deficit which apparently, isn’t his fault.

The reason it’s ridiculous to suggest that Wall Street’s revised Treasury issuance projections (which of course cite the tax plan) are somehow an attempt to unjustifiably blame Trump is the same reason it’s ridiculous to suggest that the media is out to get the President: Wall Street is simply stating facts about what the tax bill means just like the media is simply reporting what Trump actually said and/or did.

One of the banks out on Friday revising up their projections for Treasury issuance is Goldman and there’s a super-ridiculous narrative floating around about how, by citing the tax plan, the bank is trying to shield the Fed from criticism for its role in effectively enabling fiscal irresponsibility over the years.

Anyone see what’s ridiculous about that narrative? Yeah, we do too.

What’s ridiculous about that narrative is that the architects of Trump’s tax plan (Cohn and Mnuchin) used to work at Goldman. So if Goldman is out to shield former employees – like say Bill Dudley – from blame for a rising deficit, one imagines Cohn and Mnuchin are like “hey, what the fuck?” because after all, they’re former Goldmanites too and Goldman cites their tax plan as the proximate cause for the forthcoming flood of new debt issuance.

So when you hear conspiracy theories about upwardly revised projections with regard to Treasury supply, just know that there is no conspiracy. There is just reality. And the reality is this, via Gary Cohn and Steve Mnuchin’s former employer:

We expect the budget deficit to rise. We project a deficit of $750bn (3.7% of GDP) in FY2018 and $1050bn (5%) in FY2019, compared with $666bn (3.5%) in FY2017 (line 1 of the table in Exhibit 1).

The main factor behind the increase in the deficit we expect is the recently enacted tax legislation, which more than offsets the fiscal effects of an improving economy.

GSTreasury

See that bolded bit? Yeah, that’s the reality of the tax plan put forth by the “fiscally responsible” GOP. A tax plan that Right-wingers have spent the last two months bending over backwards to defend against charges that it doesn’t reflect the type of fiscal rectitude befitting of the Republican party.

Here’s Goldman’s estimates of net bill issuance plus gross issuance by security through 2021:

TreasuryIssuance

Oddly enough, BofAML agrees with Goldman.

Of course the “oddly enough” bit there is sarcasm because again, there is nothing ambiguous here. The tax plan is going to balloon the deficit and is not going to pay for itself. Point blank, period. Here’s BofAML:

We expect the Tax Cuts and Jobs Act to boost near-term growth and worsen the US deficit outlook.

We now expect the US budget balance in FY18 and FY19 to be -$790bn and -$1,050bn vs -$645bn and -$689bn, previously. Our new budget deficit figures take into account both the tax plan and other fiscal policy developments.

The higher deficit projections are likely to further increase Treasury borrowing needs. We expect the Treasury to raise a net $618bn and $905bn vs current coupon sizes in FY18 and FY19 due to the deficit and Fed portfolio unwind. Although issuance should be concentrated at the front-end and belly of the curve, we estimate the supply magnitude and modest increases to 10s and bonds will raise 10Y duration equivalent supply nearly $200bn (Chart of the Day).

Issuance

See how this works? It isn’t complicated. It’s numbers. Math. Facts. Reality.

What isn’t entirely clear is what’s going to happen in an environment of increased supply now that the Fed is letting its balanced sheet rolloff and now that there are questions about the extent to which China will continue to prop up the market.

At the very least, the above argues for higher rates and in the event that translates into an increase in bond market vol. and a concurrent drawdown in equities (i.e. “a tantrum”), Donald Trump will have no one but himself to blame for saddling America with more debt in order to finance tax cuts for himself and all of the rich friends he swears he doesn’t have.

And when that day comes, Trump will have to own the market correction just like he’s Twitter-owned the market rally.

To that, we would say the same thing that we would say to anyone who might have tried to suggest on Friday that the numbers shown above somehow aren’t related to Trump and who might now be irritated at us for calling out the bullshit: “you made your bed, now sleep.”

**************

 

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16 comments on “Wall Street Warns Of ‘Supply Floodgate’ As Trump’s Tax Bill Balloons Deficit

  1. The US twin deficits will crash the dollar – even more than USD has already collapsed. History shows so.

    The days of the US living beyond its means, largely financed by its fading, reserve currency “exorbitant privilege”, are gradually ending. China successfully drove a stake through the heart of the petrodollar last year, which was the lynch pin of of US financial hegemony and prosperity. As the petroyuan has emerged (bearing in mind that China uses more oil than anyone, is the world’s biggest consumer and also the worlds largest trading nation), the dollar has fallen into an historic collapse for the ages. Of course this necessitates a corresponding reduction in the US standard of living.

    As for the Squid, they never suffer a standard of living reduction, even when they screw up like ten yrs ago.

  2. Where were all you liberals ( heis) when Obama and his liberal contingent raised debt from 10 to20 trillion? Geez, you guys are blinded by your hatred of Trump. Dollar not going to cash – just adjust for benefit of many.

    • “Where was Heis when Obama and his liberal contingent raised debt from 10 to20 trillion?”

      Drunk.

    • Hi Ed
      Perhaps you list out some things that Obama spent that 10 trillion. Aside from the $800 stimulus bill in 2009, at the height of the “great recession” I can see no programs that Obama spent 9 trillion on.

      I am sure that the debt in question was spent to recapitalize Wall Street banks and insurers but perhaps you know something that I do not. BTW, one last thing .. it’s Congress that spends, not the President.

      • Sorry .. that’s 800 Billion .. the lack of an edit button prevents me from correcting that.

        Lastly I would add that you don’t want to be a sucker Ed. Think for yourself. Fox News is doing you no favors.

      • I think Ed’s point is that Obama doubled the debt ceiling. Banks were recapitalized primarily through QE and artificially-suppressed rates on the short end of the yield curve to boost bank profits. Not by presidential or congressional spending.

        You know the difference between Republicans and Democrats? The republicans want to curb deficit spending only when the democrats are in power but not when they’re in power, while the democrats always want to expand spending.

        So it’s out of control and a pox on them all. Glad I left that “shithole”, lol.

        • I think that Ed was referring to the increase in US debt during the Obama years, and he was attaching it to “liberals” (WTF?). I was simply askling him what Obama spent it on if he did indeed spend 10 trillion dollars .. he did not, but my query was designed to make Ed reflect on his talking point and realize that it’s pure BS, which is widely disseminated by Fox News, etc .. as an attack on Obama.

          Of course getting any Trumpite to reflect on reality is a loser’s game, so I am OK with taking this loss. Perhaps in his sleep Ed will slowly realize that his reality is not really reality. He’s a spoon fed sucker. I am still waiting for Ed weigh in.

          Economics these days is difficult enough to understand without distorting facts thru a political lens. I try to avoid that.

  3. > Dollar not going to cash – just adjust for benefit of many.

    By FX standards, it already is crashing. Like almost 20% in a year against European currencies and more against some others.

    For the “benefit of many”…whom? A collapsing currency often correlates with a collapsing economy. Otherwise, Zimbabwe and Argentina and Venezuela would be rich nations given their FX devaluations.

    The devaluation ultimately impoverishes the middle and lower classes eventually as their buying power & standard of living fall. The rich investor class muddles through, as stock prices rise in nominal terms, therefore at least partially protecting that class against the loss of dollar buying power.

    Finally, I’m no liberal but you can’t blame those runaway debts on Obama or any single leader. Long bipartisan effort. Blame the people who vote for the shit.

    • Bunny, agree the political hacks elected to run our Country spend our money as if it is theirs. Middle Class disappearing due to Fed interference .(QE/QT) However, dollar not crashing, euro going up. Great for aiding our trade deficit with Europe. Don’t see a Zimbabwe situation on horizon. Do see market correction/crash due soon but I believe Heis probably is right! This insanity can continue longer than ——-

      • Brian OShea

        Something big is about to happen. 2nd day in a row that the VIX has risen at the same time the market continues to rip higher. Those short volatility are in big trouble, it is a very crowded trade and it looks like a trend is starting to form, 1 day isn’t a trend neither is 2 days but the VIX 90% of the time decreases when the market rises the last two days it has risen….

        • Hmm, I noticed this, too, but didn’t think much of it until you reminded me about it just now.

      • Yes, not the Argentine/Zimbabwen/German/Venezuelan situation. But the analogy is that stocks rise as the currency falters (as USD has collapsed against ALL major currencies, not just against Euro, which has actually lagged some other currencies).

        Fallen dollar and higher stocks is even what Mnuchin and Trump want! Fools!! The middle/lower classes will suffer for it whilst the elite keep their wealth intact via stocks. Britain did the same as it passed the baton to America, just as America is passing the baton to China – which is where it belongs anyway as historically the fact is that China or India were the largest economies in the world for 18 of the previous 20 centuries.

        What collapsed China previously? Some of the same shit that America is doing now like embracing socialism and backing away from competitive trade (Trump & Hillary were both terribly mistaken to promise withdrawal from the Asian TPP and thereby hand it to China). The Chinese Emperor’s decision three centuries ago to reject trade and embrace isolationism before the collapse of China and its famed Silk Road (now being restored with OBOR) turned China from being the world’s richest nation before 1800 into the world’s poorest nation by the 20th century – as did Maoist socialism of course. America apparently intent on following that pattern: less trade and more socialism…Boo!!

        It doesn’t have to be that way. Problem is that 90% of American millennials prefer socialism, while 90% of east Asian millennials (including me) reject socialism (as our parents & grandparents suffered the hardships of socialism). If those preferences persist and transform national policy, guess who will probably own the 21st century?

      • Note Ed — to clarify, “irb” post above is actually me… Just a different device/browser from before I registered as a user here.

  4. Great read. Clearly shows why the 10Y yield is jumping. Simply more paper to sell. Interesting will be the fed’s response! If any….

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