2025 Themes: The Bill Comes Due

The bill comes due for the FOMC bond buying and fiscal spending boom

2025 Themes: Pandemic Policy Backlash

• FOMC Resistance

• The Bill for Fed Bond Buying & Government Spending Comes Due

• Global Current Account Rebalancing

• A Mar-a-Lago Accord?

2024 Themes: The Debt Shadow

• The Fiscal Limit

• The Petrodollar

• Demographics are Destiny

• Productivity Boom

2023 Themes: Macro Themes for '23 and Beyond

• The Battle of the Bonds

• Globalization: Descending into Darkness?

• Technology & Energy: Revenge of the Old Economy

2022 Themes: Macro Themes for the '20s Cycle

• ‘60s or ‘70: Length of the Cycle

• The End of US Equity Market Outperformance?

• Power to the People

• The Natural Rate of Interest

2021 Themes: Macro Themes for 2021 & Beyond

• Echoes of the ‘60s

• Schumpeter’s Gale: The Pandemic

• Rebuilding the US Capital Stock

• Deglobalization, Collectivism and Mercantilism

• The End of the 39-Year Bond Bull Market

2020 Themes: Macro Trends for 2020 & Beyond

• Deglobalization

• Capitalism, Socialism and Mercantilism

• Energy & ESG

• Interest Rate Suppression

Thematic Review

The most consistent theme in our annual macro themes notes over the last four years, and again this year, has been the end of the 39-year bond bull market, and the second post-war secular bond bear market. This year’s note focuses on the pandemic policy panic that led to a bloated Fed balance sheet, record levels of government spending and the largest US quarterly current account deficit on record, bill coming due. The Biden Administration and Federal Reserve left the incoming Trump economic team with a debt management quagmire. The problems are so consequential that they are likely to impact asset prices through the balance of the decade. Government spending and the Fed’s securities held outright at 24% of GDP cannot be reduced to levels that stabilize the most important price in the global capital markets system, the dollar price of the 10-year Treasury, with a single reconciliation bill or FOMC meeting. Both the federal government and Federal Reserve need to be restructured, business as usual with different leadership, is unlikely to be sufficient to stabilize government debt. More likely bond vigilantes and exchange rate crises for export dependent energy starved economies and emerging market nations with large dollar denominated debt will be required as forcing mechanisms. It is often said Congress never does anything without a crisis. The US economy is the most dynamic and innovative major economy, our 2025 Outlook: Targeting a Trifecta, discusses our optimistic outlook for capital investment and productivity, this note covers the pandemic policy mistakes that are the biggest threat to US prosperity. We believe we are entering a period of dramatic policy change faced with the largest risks since the end of the dollar gold standard in 1971.

Figure 1: In periods of higher inflation and positive real interest rates the correlation of stock prices and bond yields tends to be negative. Tightening cycles have a similar impact on correlation. The transition from financial repression and disinflation in the ‘50s to profligate government spending, faster inflation and tighter monetary policy in the ‘60s flipped stock bond (yield) correlation from positive to negative. We strongly suspect we entered a similar regime in the ‘20s.