The Hillary Step

The jobs recovery remains extremely weak. The WSJ Weekend shows the 2008 recovery rate as the weakest on record. Interestingly,  the other "extended period" experiment also was slow to generate employment. The cost of credit is not a major determinant of hiring. Unemployment is now the only real restraint on inflation.

The financial system was creating unheard of amounts of credit prior to 2007 despite 15 well advertised rate hikes from 1 to 5%. The lesson not learned from the crisis, despite gargantuan regulatory changes and new bureaucracies built for our "protection," is that the level of rates is a poor metric of credit conditions. Both the supply and the demand curves have shifted downward during the prolonged period of the ZIRP.

The budget will veer the ship of state away from the spending/entitlement abyss. The Fed will cease - at least for a time - the monetization of those obligations. This will provide a window in Q3 and Q4 to observe any ability of the private sector to fill the gap. We call this approaching moment The Hillary Step of the Mt. Everest of debt cycles. You must transverse it to summit but you "die a little" in the process.

The debate will be nothing more than at what price? Europe provides a stark example of participants saying, "Not here." Portugal's year Bill auction is deemed a "success" because it was oversubscribed. The yield was 5.80!! Year Bills in Spain are 2.6, in Germany 1.5 and the US a paltry 26bp. Not a point of pride, the US rate is a global scarlet letter of shame. Are we to believe the world ends if it were to double? Let's make the step, I hear the view on the other side

is spectacular.

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