The Swamp Walker Delight

Posted on November 17, 2023 by MN Gordon

If you can understand how the modern swamp walker thinks, you are better positioned to see how credit rating agencies and stopgap bills are both moving America towards a similar end.

Last week Moody’s Investor Service lowered its U.S. credit outlook from ‘stable’ to ‘negative.’  At the same time, Moody’s kept the U.S. at AAA, its highest rating.  What’s the holdup?

Several months ago, Fitch downgraded its U.S. credit rating from AAA to AA+.  S&P Global Ratings downgraded U.S. credit all the way back in 2011.  Does Moody’s really believe U.S. credit is ultra-safe?

By all honest accounts, the U.S. government’s financial condition has changed dramatically for the worst over the last 50 years.  Somehow Moody’s rates its credit as if the nation’s debt profile is still sound and sober.

By lowering its credit outlook Moody’s is likely setting the stage for an actual downgrade. Yet at this point a credit downgrade would come much too late for anyone to really care about.  Certainly, it won’t compel Washington to get a handle on its spending problem. Continue reading →

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The War and Peace of Secular Market Cycles

Posted on November 10, 2023 by MN Gordon

Projections from the Congressional Budget Office show Washington racking up an additional $20.2 trillion in debt over the next decade.  That would put the national debt somewhere around $54 trillion.

The national debt, which is the accumulation of annual budget deficits, is growing at a rate of roughly $2 trillion per year.  Much of this debt is needed to make good on mandatory outlays like social security, medicare, and health spending.  Some of the debt covers discretionary spending such as defense and transportation.

There’s also net interest on debt.  This recently topped $1 trillion a year for the first time ever.  Washington is essentially borrowing money to pay the interest on the debt.  This is no way to run a country.

These projections – the $2 trillion per year deficits – generally assume everything remains status quo.  That real gross domestic product increases at an annual rate of 2.4 percent.  And that there are no new wars, pandemics, or other freedom inhibiting crisis events – whether intentional or not – that would blow these budget projections out of the water. Continue reading →

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Once Upon a Time in Flagstaff

Posted on November 3, 2023 by MN Gordon

During the great bond bull market from September 1981 to July 2020 the yield on the 10-Year Treasury note fell from 15.32 percent to 0.62 percent.  Since then, the yield has spiked up to where it currently sits at about 4.66 percent.

The rapid interest rate flux has been unpleasant for bankers, borrowers, and businesses.  By our estimation the unpleasantness has only just begun.

After nearly 40 years of ever forgiving credit markets, where debts could be refinanced at lower and lower rates, there’s an abundance of rottenness to be purged from the system.  The great asset price liquidation is still forthcoming.  That’s our expectation, should central planner’s stay out of it.

But what if the pain has already come and gone?

Could the worst bond bear market in the 247-year history of the United States be coming to an end?  Is now a good time for stock market investors to buy shares of their favorite businesses? Continue reading →

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Death to Savers

Posted on October 27, 2023 by MN Gordon

The Federal Reserve artificially suppressed interest rates from roughly 2008 to 2022.  It did so by creating $8 trillion of credit out of thin air to buy Treasuries and mortgage-backed securities.

This pushed stock, bond, and real estate markets well beyond what the underlying economy could support.  Falsified interest rates also birthed wild objects of speculation.

Speculative manias always gain momentum through the expansion of credit.  A look back at past manias tells a familiar story.

For example, the mania for tulips in Holland in 1636 and 1637 was intensified by personal credit.  At the peak, sellers had no bulbs.  Yet buyers, lacking cash, made down payments with personal possessions.

John Law’s Mississippi Bubble from 1718 to 1720 was puffed up by paper notes issued by his Banque Générale, later the Banque Royale.  The mania for residential real estate from 2003 to 2007, was made possible by low interest rates and the expansion of credit through mortgage-backed securities. Continue reading →

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