By David Stockman as originally published on Contra Corner and reprinted here with permission
America’s economy is faltering not from too little infrastructure spending, but from too much debt—-$67 trillion of total public and private debt, to be exact. So it appears that the bond vigilantes are returning from 24 years of hibernation just in the nick of time to put the kibosh on the Trumpite/GOP’s latest hare-brained scheme to balloon the public debt.
As if the impending FY 2019 collision between $1.2 trillion of new Treasury borrowing and the Fed’s $600 billion bond-dumping campaign (QT) were not enough, word now comes that Tuesday’s night’s State of the Union (SOTU) adress will feature a $1.7 trillion infrastructure plan.
We’d say rechristen the Donald as “Boondoggle Don” and be done with it. On top of the $1 trillion + deficits already rumbling down the pike, the very idea of a massive debt-financed, pork-barrel driven borrow and spend spree 104 months into a business cycle expansion is sheer lunacy.
And don’t take our word for it—even if we have been smoked by the bond vigilantes up close and personal, and more than once. Yesterday’s breakout to a 2.72% yield on the 10-year treasury note, it is more likely than not that the bond-selling stampede has commenced.
To wit, the greatest no-brainer trade ever invented has been front-running on repo (i.e. 95% borrowed money) the massive bond-buying campaigns of the central banks: The carry was free, the bond price was guaranteed to rise, the spread was fulsome, the central banks’ policy signals were well-telegraphed and transparent, and through it all bond traders slept like babies without risk of Ambien addiction.
That is to say, on top of the $20 trillion of bond supply that the central banks have taken out of the market with credits conjured from thin air since 1995, trillions more was absorbed by leveraged speculators who were buying today exactly what the central banks had pledged to be buying tomorrow—-right down to the cusip number.
Needless to say, that double whammy of bond price levitation is over and done. With central banks rapidly winding down their QE bond purchases, the smart money is about to make its own pivot.That is, toward selling what the Keynesian central banks will be selling as the latter desperately scramble to shrink their elephantine balance sheets, and reload the dry powder they believe will be needed to combat the next recession.
To that end, it is worth noting that the 10-year yield has now doubled from it’s all-time closing low of 1.36% recorded on July 5, 2016. Having gone eyeball-to-eyeball with a yield of 15.86% back in September 1981, we can say this: A 92% yield drop over 37 years defined an aberrational era that virtually destroyed all intellectual muscle memory in the bond pits.
Neither the trading algorithms nor the remaining carbon-based bond jockeys have ever known a sustained period of rising yields.
Likewise, they have operated for a lifetime in hot-house markets where massive, sustained central bank bond buying over-rode and deformed any ordinary dynamic of supply and demand fundamentals. Accordingly, the denizens of today’s electronic bond pits don’t know from “price discovery” and can’t imagine a scenario in which the central banks don’t have their backs.
But that’s precisely why a “yield shock” is imminent. In fact, now comes the black swan with an orange-colored hue; Trump’s SOTU boondoggle may well be the risk-off pin that the current manic financial bubble has been searching for since November 8, 2016.
Stated differently, Boondoggle Don may be commencing god’s work after all. In the current fraught environment, it will not take much to trigger a self-fueling bond market sell-off that will finally bring down the entire debt-enabled house of cards.
In this context, we’d also bet heavily on the proposition that the chart below has never been seen inside the White House. Unlike the warmed over supply-side fantasies being ponied-up by geriatric supply-siders like Steve Forbes and Stephen Moore, this chart is about the real economics of our time; it dwarfs into insignificance Art Laffer’s four-decades ago napkin scriblings.
To wit, as recently as January 2017, the major central banks were draining securities from the bond pits at a $2.1 trillion annual rate, thereby injecting a tsunami of newly minted cash into the casino where it found its way into corporates, junk bonds, ETFs, short vol trades and even more exotic “risk-on” speculations.
But with the Fed now dumping its bloated portfolio at $20 billion per month, the central bank bond buying rate has already dropped to $1.5 trillion per annum. Moreover, by year-end the latter will plunge to barely $300 billion annualized, as the Fed ramps its bond dumping by $10 billion per month every quarter, and, as a leading member of the ECB board confirmed this weekend, the eurozone also exits the QE business by September.
In short, a year from now the collective central bank balance sheet of the planet will be shrinking for the first time in modern history. Not in a month of Sundays could you imagine a worst time for a $1.7 trillion per year infrastructure boondoggle.
Indeed, the bad news for bonds just keeps coming—even as the last remnant of carry traders boil silently like frogs in a heating pot.
It now appears that the Christmas spending exuberance by US households was financed on the margin by borrowing. Accordingly, the personal savings rate reported this AM for December was the lowest monthly rate in 13 years, and among the weakest ever recorded.
So if not US households, the Fed, the ECB, or even the PBOC—then exactly who is going to buy all the debt that the US treasury is fixing to emit at the very time that central banks are aggressively deactivating their “buy” keys?
We’d bet nobody—-or at least not at a yield anything close to 2.72% on the ten-year.
In this context, let us also be very clear about our choice of the “boondoggle” pejorative to describe the impending Trump plan. Aside from self-serving claims of the infrastructure lobbies, there is precious little evidence that economic growth and good jobs in the US are being held back by deficient infrastructure; and no reason whatsoever to believe that Washington politicians have the capacity to efficiently remedy whatever shortfalls may actually exist.
The fact is, Washington based infrastructure spending is inherently wasteful and anti-growth. That’s because there is virtually no category of so-called infrastructure—-highways, bridges, mass transit, airports, water and sewer, communications and power and ports and waterways—that would not be more efficiently and productively funded by the private sector, user fees or state and local units of government best positioned to match local benefits with the related costs.
By contrast, everywhere and always Washington-directed infrastructure spending degenerates into pork barrel and log-rolling. That’s inherent in the committee and sub-committee driven modus operandi of Capitol Hill, the single-member district/two-year election cycle and a campaign finance system dominated by beltway lobbies and the local donor class.
Besides, possibly apart from the 47,00 miles of Interstate Highways, there is no such thing as national infrastructure. Ports, airports, local streets and highways, water and sewer services, mass transit and every kind of local public utilities actually comprise an integral component of economic competition between localities and regions, and are properly paid for by the users and taxpayers within those economic catchment zones.
Indeed, when resource allocation escalates to the Imperial City it simply incites a process of inter-regional theft and wasteful political exploitation. Powerful Congressmen and subcommittee chairmen steer the pork to their own districts and disperse the taxes (or future debt service costs) far and wide to the unsuspecting citizens of other states and districts.
Needless to say, their own grateful voters would never embrace local user fees or taxes to pay for such largesse. Even less so, would they elect to pay for the maintenance and upkeep—and especially any adverse blowback from mother nature.
For instance, the $100 billion of damages that resulted when Irma flooded Houston last summer was paid for by the unsuspecting taxpayers of the other 49 states. Alas, these were the very same unsuspecting taxpayers who over the years financed the Houston Ship Channel, which enabled the floods in the first place.
The truth is that pork barrel waste and inefficiency are endemic to the degenerative form of money-driven democracy that now prevails in the Imperial City. So the Trump White House should not even bother with a detailed plan by category of so-called infrastructure (e.g. highways, bridges, transit etc.).
Instead, it would get the same short-term economic effect by embracing a giant borrow and spend scheme called Making Trump’s Pyramids Great Again (MTPGA). Put one such white elephant in every one of the nation’s 3,007 counties and you would get the same result.
That is, short-term swelling of construction and supplier industry jobs, and a permanent albatross of unproductive assets and debilitating debt service. And it doesn’t matter whether Trump’s proposed giant infrastructure spending spree is debt-financed directly from the red-ink clotted US Treasury or by private firms via some kind of tax-incentivized public/private partnerships.
That’s because if an infrastructure program doesn’t add to the efficiency and productivity of the US economy, it will amount to a dead weight cost every bit as much as 3007 pyramids would.
The truth is, the Donald’s impending infrastructure boondoggle will not stimulate jobs and growth and Trumpian MAGA. It’s really just Keynesian claptrap, and not surprisingly so.
Donald Trump never had more than a slogan when it comes to his ballyhooed trillion dollar infrastructure program. After all, having spent a lifetime building stuff with borrowed money, why would he think otherwise?
As we demonstrate below, however, whatever does emerge in terms of program detail and category allocations will amount to little more than a rebranded version of the waste and excess that is already built into the Federal budget; and anything new will be culled from Swamp leavenings that have not even made the cut under the existing pork barrel regime.
So that gets us to the fundamentals—of which we take the ballyhooed “crumbling bridges” of America as an illustrative case in point. The Swamp creatures never stop gumming about America’s purported63,000 “obsolete and deficient” bridges, but that’s a complete, bald-faced scam.
In the first place, America’s 650,000 bridges are not wanting for neglect. Constant dollar spending has more than doubled since the turn of the century. And as further developed below, the overwhelming share of so-called obsolete bridges are located on one-horse country roads in rural America, where they are rarely used and constitute a danger to virtually no one.
The mythology about crumbling bridges, of course, is based on the occasional bridge failure that becomes a momentary cable news sensation. But these stories are not representative of the actual facts and deserve a special debunking because the “crumbling bridges falling down” story has become a symbol of the entire phony campaign for massive infrastructure spending and borrowing.
Indeed, to hear the K-Street lobbies tell it, motorists all across America are at risk of plunging into the drink at any time owing to defective bridges.
Even Ronald Reagan fell for that one. During the long trauma of the 1981— 82 recession, the Reagan Administration had stoutly resisted the temptation to implement a Keynesian-style fiscal-stimulus and jobs program– notwithstanding an unemployment rate that peaked in double digits. But within just a few months of the bottom, along came a Republican secretary of transportation, Drew Lewis, with a presidential briefing on the alleged disrepair of the nation’s highways and bridges.
The briefing was accompanied by a Cabinet Room full of easels bearing pictures of dilapidated bridges and roads and a plan to dramatically increase highway spending and the gas tax. Not surprisingly, DOT Secretary Drew Lewis was a former governor and the top GOP fundraiser of the era.
So the Cabinet Room was soon figuratively surrounded by a muscular coalition of road builders, construction machinery suppliers, asphalt and concrete vendors, governors, mayors and legislators and the AFL-CIO building-trades department.
And if that wasn’t enough, Lewis had also made deals to line up the highway safety and beautification lobby, bicycle enthusiasts and all the motley array of mass transit interest groups. They were all singing from the same crumbling infrastructure playbook. As Lewis summarized and Donald Trump is apparently now channeling,
“We have highways and bridges that are falling down around our ears– that’s really the thrust of the program.”
By the time a pork-laden highway bill was rammed through a lame duck session of Congress in December 1982, the president’s speechwriters had gone all-in for the crumbling infrastructure gambit. Explaining why he signed the bill, the scourge of Big Government himself, Ronald Reagan, noted,
“We have 23,000 bridges in need of replacement or rehabilitation; 40 percent of our bridges are over 40 years old.”
So here we are 36 years later, and those very same bridges are purportedly still falling down!
But they aren’t. What we are dealing with can best be described as “The Tale of Madison County Bridges to Nowhere.”
In fact, there could not be a more striking example of why Donald Trump is way off the deep-end with his trillion-dollar infrastructure boondoggle, and also why the principle that local users and taxpayers should fund local infrastructure is such a crucial tenet of both fiscal solvency and honest government.
In this context, the crumbling-bridges myth starts with the claim by DOT and the industry lobbies that there are 63,000 bridges across the nation that are “structurally deficient.” This suggests that millions of motorists are at risk of a perilous dive into the cold waters below.
But here’s the thing. Roughly one-third, or 20,000, of these purportedly hazardous bridges are located in six rural states in America’s midsection: Iowa, Oklahoma, Missouri, Kansas, Nebraska and South Dakota.
The fact that these states account for only 5.9% of the nation’s population seems more than a little incongruous but that isn’t even half the puzzle.
It seems that these thinly populated town and-country states have a grand total of 118,000 bridges. That is, one bridge for every 160 citizens. Men, women and children included. And the biggest bridge state among them is, yes, Iowa.
The state has 3 million souls and nearly 25,000 bridges– one for every 125 people. So suddenly the picture is crystal clear. These are not the kind of bridges that thousands of cars and heavy-duty trucks pass over each day.
No, they are mainly the kind Clint Eastwood was photographing in the movie about Madison County and needed a local farmwife to locate– so he could take pictures for a National Geographic spread on “covered bridges.”
Stated differently, the overwhelming bulk of the 600,000 so-called “bridges” in America are so little used that they are more often crossed by dogs, cows, cats and tractors than they are by passenger motorists. That’s born out by the fact that these so-called “obsolete and structurally deficient bridges” account for less than 6% of annual vehicle miles traveled on bridges in the US according to the DOT’s own 2015 study.
Accordingly, these country bridges are essentially no different than local playgrounds and municipal parks. They have nothing to do with interstate commerce, GDP growth or national public infrastructure.
If they are structurally deficient as measured by DOT engineering standards, that is not exactly startling news to the host village, township and county governments that choose not to upgrade them. So if Iowa is content to live with 5,000 antique wooden bridges––1 in 5 of its 25,000 bridges– that are deemed structurally deficient by the DOT, why is this a national crisis?
Self-evidently, the electorate and officialdom of Iowa do not consider these bridges to be a public-safety hazard or something would have been done long ago. The evidence for that is in another startling “fun fact” about the nation’s bridges.
Compared to the 19,000 so-called “structurally deficient” bridges in the six rural states reviewed here, there are also 19,000 such deficient bridges in another group of 35 states– including Texas, Maryland, Massachusetts, Virginia, Washington, Oregon, Michigan, Arizona, Colorado, Florida, New Jersey and Wisconsin, among others.
But these states have a combined population of 175 million, not 19 million as in the six rural states; and more than 600 citizens per bridge, not 125 as in Iowa. Moreover, only 7 percent of the bridges in these 35 states are considered to be structurally deficient rather than 21 percent as in Iowa.
So the long and short of it is self-evident: Iowa still has a lot of one-horse bridges, and Massachusetts– with 1,300 citizens per bridge– does not. None of this is remotely relevant to a purported national-infrastructure crisis today– any more than it was in 1982 when even Ronald Reagan fell for “23,000 bridges in need of replacement or rehabilitation.”
Stated differently, Ronald Reagan failed to drain the swamp despite his best intentions. Donald Trump, by contrast, seems well on the way to filling it even deeper with malice aforethought—as we will demonstrate in Part 2 tomorrow.