Economic Inertia and Impulse
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Once upon a time, two traumatized little boys inherited a healthy economy that was the envy of the world…and immediately went about trying to burn it down.
Fortunately, it will take some time to completely turn the macro economy into a smouldering mess…even for two clowns who excel at ruining businesses (Trump has the inverse Midas touch where everything and everyone he touches goes bankrupt — both morally and economically — , and Musk took a $45B business, fired 80% of the workers and turned it into a $18B business and is now in the process of destroying Tesla).
However, I have been reminding subscribers that the US economy has a huge inertia that will require a huge “impulse” (force x time) to change its primary trend.
The continuing resolution was passed on Friday without reducing spending through September. This means that the ‘force’ (spending) part of the impulse will continue to push bullishly on the economy for the rest of fiscal-2025. The deficit (net-transfer) and nominal spending is running at the highest rate in 3-years (chart below).
Unfortunately, the resolution allows the for the spending to be shifted away from the original Congressionally-legislated budget areas: i.e. funding designated by Congress for a particular agency can be shifted over to some other initiative, as determined by Elon Musk (DOGE). For example, money designated for the Veteran Affairs agency could instead be used to fund tax-cuts for the rich, or to fund Elon’s cartoonish “Mars Project”. The possibilities are many, but most will not improve people’s lives or make them more productive. The only consolation is that because the money-creation rate is being maintained, it will take time for the changes to visibly damage the economy. It looks like a recession is being “baked in” for 2026–7.
The 10y-2y differential in the T-rate needs to invert for the second time, and a minimum of several months to pass before we can reasonably expect a recession or even a serious turn-down (chart below). The differential is positive and moving higher.
Some voices have been expressing concern about the level of margin debt in the stock market. Although the nominal margin debt is at a historically high level, the debt-to-equity level (margin debt/NASDQ100) is at a historic low; debt level is low and not problematic at this point.
In the short-term, the market is technically ready for a bounce (chart below), but an event (for subscribers only) is coming that will limit the rally.
We continue to keep ourselves on the primary trend.
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