Has the Dollar bottomed?
After a 2.5% pullback to start 2017 the Dollar has popped 1% in the past two days after Janet Yellen made a 3pm speech saying U.S. economy is “close” to the Central Bank’s objectives of full employment and stable prices and she’s confident it will continue to improve.
“It is fair to say the economy is near maximum employment and inflation is moving toward our goal,” Yellen told the Commonwealth Club in San Francisco Wednesday. While “it makes sense to gradually reduce the level of monetary policy support,” the timing of the next interest-rate increase “will depend on how the economy actually evolves over coming months,” she said.
So the better the economy does, the faster the Fed will raise rates (duh!) and Yellen indicated a target for a 3% Fed funds rate by 2019, which would be 9 raises from here – a faster pace of increases than most economorons were expecting. Inflation is, of course, exactly what we're expecting in 2017 and 2018 and I discussed that strategy on Money Talk last night.
The last time unemployment was this low was back in 2006 and 2007 and that marked the end, not the beginning of the market rally. Full employment leads to higher wages and higher wages lead to inflation and that is so obvious I feel silly for saying it but, apparently, it's a surprise to "leading economists" who are consistently shocked by things they should have learned in Econ 101.
That's why I'm growing a beard – I've decided to become a leading economist so I need to start looking the part! As you can see from this chart, 4.9% unemployment is low but we've been down to 4% so we can go lower and our new President promises to create those jobs (1.6M jobs = 1%), which is no different than promising to create inflation and so, we have our "Secret Santa’s Inflation Hedges for 2017," including the Trade of the Year we discussed on TV last night.
As much as it wants to, the market simply cannot have it all. If we are going to lower unemployment than we are going to drive labor costs higher (until we're all replaced by machines, which is still a few years off) and that forces the Fed to tighten and, aside from putting the brakes on economic activity, it raises the cost of servicing our $20,000,000,000,000 National Debt.
At 3%, it will cost us $600Bn just to pay the interest on the debt each year, that's $400Bn per year MORE than we're paying now. Where will that money come from? The Government only spends $107Bn a year on Food and Nutrition Assistance programs and only $60Bn on Higher Education and only $42Bn on Unemployment – you can cut all that out and you won't make up $400Bn a year!
So not only will NORMAL interest rates cost the US $4Tn over 10 years but the Trump Tax Cuts are looking to cost $9.5Tn, including $2.6Tn of Corporate Tax cuts which would be MORE THAN THEY PAID over the last 10 years combined! Repealing the estate tax would cost yet another $300Bn – where will all this money come from?
If you are currently buying into the stock market and paying 25x multiples for companies, the answer is, of course, "magic beans" and why not – it's worked so well in the past. While the numbers are terrifying over the next decade, the decade after that becomes, well damn, I guess I shouldn't have led with "terrifying" but what's 1.5x worse than terrifying? After running up $9.5Tn in debt by 2026 the Trump Tax Plan – if it allowed to run wild, will rack up another $15Tn in debt – that's $1.5 TRILLION per year – starting in 2027.
To be clear, our National Debt is NOW $20Tn and Trump plans to add $10Tn by 2026 and another $15Tn by 2036 brings it to a staggering $45Tn which would require roughly $1.5Tn PER YEAR in debt service alone. Even with Trump's own projections of an economy growing at a China-like 6% per year, we still end up 150% of our GDP in debt – 50% worse off than we are today. Well, not us, I'll be 73 and living in Bali by then but it does suck for our children and their children, doesn't it?
What possible madness, you may wonder, would cause a person or a Government to pursue a strategy that ultimately destroys it? Well it's a Conservative Strategy called "Starve the Beast" which aims to cripple Government by depriving it of cash so that it can never be re-formed. You see – it's not good enough for the anti-Government forces to win an election and simply dismantle the Government. They may lose an election in the Future to people who may rebuild it.
To truly destroy a Government you have to saddle it with so much debt that it can't afford to provide services to it's people – even if it wants to (austerity) and choke off it's cash supply so it can't afford to regulate or hire people to do project that might take money away from Corporations who could subcontract for huge profits and, best of all, you can force the Government to sell off it's assets – leaving it completely bankrupt and powerless.
As I said at the time, Greece was only a test run – the big show starts tomorrow at noon as we begin the Trump Error.
