Yay – A Budget

A Budget. And with it a look at the assumptions and paths to "get on down the road" to the crisis everyone says is going to happen.

The decade long numbers are fun to look at but I like to look at the next few years. If they get these wrong the far out skews even more (better or worse) and the Fed's FG gambit plays right into the 2014 - 2017 budget predictions.

Year R-GDP CPI Nom 10 Yr Bill  Curve
2104 3.3 1.6 3 0.1 290
2015 3.4 2 3.5 0.3 320
2016 3.3 2.1 4 1.2 320
2017 3.2 2.1 4.3 2.3 200

Well, isn't that special? For the next 2 years the Budget closely follows the modified (post crisis) Cocktail Party Economics Trick of Real GDP tracking the Nominal 10 year yield. [As I pointed out on CNBC several years ago, its pretty safe but used to track closer to the 5 year (+the inf rate) but we've already hashed that out] The shift occurs in the 2016/2017 years as growth remains stable but yields rise. This lines up with the promoted Fed Stability Hail Mary that is FG and beyond which "There be dragons."

The 91 day T-Bill goes on a 200Bp ride that results in a marked flattening of the curve. The Real Bill Yield goes from deeply negative to slightly positive. The assumed position - thank you sir, may I have another - is no economic consequence (in lead up to up to or out of) from that shift. The assumption that leaps off the pages of the Budget is this: Stability. Rates are going to rise and term structure relationships are going to change sharply BUT everyone will be properly positioned and nothing will get over cooked or out of line. I'll  take outside.

The short end move begs the question of 200+ hikes without an increase in economic activity. The CPI movement would align to a vocalized Fed position of continued accommodation "well after inflation threshold hit." The out years see a curve that remains over 100bp steep as the mix in Real GDP benignly shifts. (Some have argued the curve could invert at a historically low level) The concept of massive amounts of Death Star action with the Great Fed as counter-party as these higher rates unfold is a new twist. Several good articles are pointing out the liquidity problem in Bonds as the Street has morphed into "Agent Only".

My view is the economy at both a real and nominal level, will need to grow much faster and that changes everything. There is a fine line between stability and funk. Large deficits, large CB balance sheets and large financial systems require economies to grow into them. The alternative is retrenchment and proves socially unacceptable. Its fun to scan the Budget and pick apart the numbers. The only important question is: How do we get there from here?

 

 

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