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.
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:
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).
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.”