Tuesday, November 20, 2018

Consumer and housing concerns are starting to bubble up

With the Holiday shopping season annoyingly underway looming, it seems like a good time to see what might be going on with consumer spending. And there was some cause for confidence when we saw last week’s US Retail Sales report for October, as the topline figures looked strong.
Advance estimates of U.S. retail and food services sales for October 2018, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $511.5 billion, an increase of 0.8 percent (±0.5 percent) from the previous month, and 4.6 percent (±0.5 percent) above October 2017. Total sales for the August 2018 through October 2018 period were up 5.0 percent (±0.5 percent) from the same period a year ago. The August 2018 to September 2018 percent change was revised from up 0.1 percent (±0.5 percent)* to down 0.1 percent (±0.2 percent)*.

Retail trade sales were up 0.9 percent (±0.5 percent) from September 2018, and 4.3 percent (±0.5 percent) above last year. Gasoline Stations were up 16.2 percent (±1.6 percent) from October 2017, while Nonstore Retailers were also up 12.1 percent (±1.4 percent) from last year.
Overall, that sounds pretty good. But note that gasoline figure, and remember that retail sales do not account for inflation.

According to the most recent Consumer Price Index report, gasoline prices rose by nearly 17% over the same time period, and was up 3% in October 2018 alone.

What this means is that these allegedly strong retail sales numbers aren’t as hot, although they’re still not bad.

Retail sales minus gasoline
Oct 2018 vs Sept 2017 +0.5%
Oct 2018 vs Oct 2017 +3.6%
Aug-Oct 2018 vs Aug-Oct 2017 +3.1%

And now that gasoline prices have fallen hard in the last month, it seems logical that retail sales might also “decline” for November, and people panic instead of looking underneath and seeing how much that drop is due to lower gas prices. But what both months may indicate is that consumer spending growth could be moderating from the strong 4.0% pace reported for 3rd Quarter GDP (and the downward revisions for September indicate that 4% figure could also end up lower).

There also is some iffiness with the housing market, as higher prices and higher interest rates might be putting homes out of reach for many people, even with low unemployment and a minor pickup in wage growth. Note this story from last week.
Mortgage application activity decreased 3.2% from one week earlier as interest rates rose to eight-year highs and refinancings fell to an 18-year low, according to the Mortgage Bankers Association.

The MBA's Weekly Mortgage Applications Survey for the week ending Nov. 9 found that the refinance index decreased 4.3% from the previous week reaching its lowest level since December 2000. The refinance share of mortgage activity increased to 39.4% of total applications from 39.1% from one week earlier.

The seasonally adjusted purchase index decreased 2.3% from one week earlier reaching its lowest level since February 2017, while the unadjusted purchase index decreased 5% compared with the previous week and was 3% lower than the same week one year ago.
On a similar note, the Wisconsin Realtors Association reported over the weekend that fewer homes continue to be sold in Wisconsin compared to last year, while prices of those homes kept rising well past the rate of inflation or wage growth.


The right-wing Realtors tried to claim the overall economy was still good, but even they had to admit that rising prices and rates were taking its toll on their business.
"Prices continued their upward trajectory and mortgage rates also increased by just under one percent over the past year, so affordability has definitely slipped," said WRA President & CEO Michael Theo. The Wisconsin Housing Affordability Index shows the fraction of the median-priced home that a buyer with median family income can qualify to purchase, assuming 20 percent down and the remainder financed using a 30-year fixed-rate mortgage. The index fell from 219 in October 2017 to 196 this past October, which is a 10.5 percent reduction in affordability over the last 12 months. "The strong economy has kept affordability from dropping further," said Theo. Median family income in the state is estimated to have increased just over 5 percent since October of last year. "The flip side of a strong national economy is that the Fed will likely continue to hike interest rates, which will translate into higher mortgage rates over the next year" he said. Rising prices and rising mortgage rates will continue to put pressure on affordability so considering a move in the winter may turn out to be a good decision in the long run.
But Wisconsin wages and job growth are hardly booming, no matter how Theo wants to spin it, and the rising home prices and increasing number of school referenda indicate that the claim of Scott Walker and the Wisconsin GOP that “your property taxes will be lower” is unlikely to be the case when you get your bill this Fall.

Now combine that squeeze with the fact that many middle-class Americans will get another surprise when they file their federal taxes and realize that it won’t be worth it to write off their mortgage interest or property taxes because the increased standard deduction is larger and the State and Local Tax (SALT) deduction is limited to $10,000 per couple. It makes me wonder if there’s a real danger of a bubble popping in housing which tightens up the wallets of Wisconsinites and others in the coming months.

Which makes it notable that there was another warning out yesterday about the housing market, and it played a role in tanking the DOW Jones Industrial Average by nearly 400 points yesterday.
Confidence among U.S. homebuilders plummeted by the most since 2014 as the highest borrowing costs in eight years restrain demand, adding to signs of a cooling housing market that will weigh on the Federal Reserve’s debate over how far to raise interest rates.

The National Association of Home Builders/Wells Fargo Housing Market Index dropped eight points in November to 60, the lowest level since August 2016, according to a report Monday. That compared with the median estimate of economists for a one-point drop to 67.

Shares of homebuilders initially fell and 10-year Treasury yields erased gains following the report, which represents one of the first breaks in elevated levels of business and consumer confidence that have persisted since Donald Trump was elected president in November 2016. While the index remains in positive territory, the group called on policy makers to take note of the housing situation as a possible warning sign about the broader economy.
But the country’s high budget deficits mean that central bankers might not want to limit their plans to keep raising interest rates, as it becomes difficult to get enough money to finance our increasing debt if bond-buyers can’t get a good rate.

I’m not saying we’re in stagflation yet, but you can see how things are set up where a number of small annoyances barriers can add up to an economic slowdown and/or recession in the near future. And the way out of that economic slowness will not be fun or easy, since we’ve already shot most of our weapons to fight those problems as a result of the GOP Tax Scam and wage growth that still doesn’t seem able to overcome the growing debt and expenses everyday people continue to have.

Which brings us back to Holiday shopping, as it seems like those figures could go a longer way than normal toward indicating whether our economy is OK heading into 2019, or is in big-time danger of going over the edge.

Monday, November 19, 2018

Evers got just enough voters to swing back to become Guv

I wanted to follow up from my pre-election analysis to see just how much the votes shifted from GOP to Dem to allow Tony Evers to become our state's next Governor.

The biggest shifts happened in the Milwaukee Metro area. Not only did Evers benefit from a big shift to Dems in the Milwaukee County suburbs and increased turnout in the City of Milwaukee, but he also held down Walker’s margin of victory in the WOW Counties, as Walker basically split the difference between himself in 2014 and Trump in 2016.
Note- all of these maps will use "Dem% - GOP%" as the baseline.


If you look at the largest counties in northeastern Wisconsin, while Walker won every one of those 6 counties, Evers outperformed Burke in all of them, and improved on Hillary Clinton’s 2016 results in 2/3 of them. This kept Walker from running up the massive margins in the 920 that were keys to his prior victories.


As WisGOPs seem to bemoan every day, central to Evers’ win was a 150,000+ vote advantage in Dane County, which was 50,000 more votes than what Burke won the county by in 2014. Tony won Dane by a comical 51%, and he also did better than either Burke or Clinton in 4 other typically blue counties that border Dane.


Another area where Evers (generally) did well in was the southwestern corner of the state. Not only did he become the first Dem to win Grant County since 2012, but he also more than doubled Burke’s win in La Crosse, and gained back rural counties that were lost badly to Trump in 2016.


For Trump to win Wisconsin in 2020, he needs this area to vote like it did in 2016. If that’s not happening (and it didn't in November 2018) the GOP’s losses in the larger metro areas will be too large to make up. So this is worth keeping an eye on.

Similarly, the area along Highway 29 in Central and Western Wisconsin was one I identified as a key tale-teller for 2018 and 2020. And as you can see, Evers made gains vs 2014 and 2016 in 3 of them, but that the Wausau area stayed strongly red.


This has big downticket implications, as it indicates Sean Duffy’s lucked into a House seat that is much easier for him to win than it was when he first won it in 2010. It also helps explain how Jeff Smith got a surprisingly easy 6-point win to keep Kathleen Vinehout’s Eau Claire-area State Senate seat in Dem hands, and the shift toward Dems in both Dunn and St. Croix Counties could help Dem Patty Schachtner hold her State Senate seat in 2020.

Lastly, let me give you this map from J. Miles Coleman at Decision Desk HQ. As you can see, Walker actually did better in some rural counties in 2018 than he did in 2014. But the more populated southern half of the state shifted harder towards Dems, and that's what did Scotty in.

Sunday, November 18, 2018

Feelings vs facts- RW snowflakes don't get the difference. Don't waste time on them

One thing that has bothered me about the 2010s is how so many right-wing politicians and media figures refuse to act in good faith, and that Dems and "legitimate" media are so inept in countering these dishonest lowlifes.

Along those lines, In Vox's Sean Illing talked with Cal-Berkeley professor George Lakoff, who notes that it's a mistake for media and politicians to repeat Donald Trump's tweets and false claims. Even if it's to say "Donald Trump is lying when he says _____," Lakoff says it's a losing strategy that allows Trump's BS to fester in people's minds.

While I find Lakoff and followers to be simplistic at times, I think he is largely spot-on here. Lakoff says that instead of reporting in Trump's statements, media and politicians should use "truth sandwiches" that use a word structure "facts - why Trump is lying about these facts - and reiterate the facts."

A mistake that Lakoff says Democrats and others make with right-wingers is that they assume all people make their opinions based on facts and are flexible to new inputs, instead of being likely to stick with what they want to believe.

(George Lakoff:) People think in terms of conceptual structures called frames and metaphors. It’s not just the facts. They have values, and they understand which facts fit into their conceptual framework. You can’t understand something if your brain doesn’t allow it, if your brain filters it out in terms of your values.

Democrats seem not to understand this, and they keep trying to employ reason as a persuasive vehicle. I wish Enlightenment reasoning was an accurate model for how most people think and judge, but it isn’t, and we better acknowledge that fact.

Sean Illing: So on some level, you’re saying that Democrats have to accept that they’re playing a different kind of conversational game, in which truth and falsity are irrelevant. If that’s the case, what use is there for a free press, or for discourse at all?

George Lakoff: Well, that’s why the truth sandwiches are important. Let me say one more thing that’s really crucial in this respect. Kellyanne Conway talked about alternative facts at one point, so the phrase comes from her. When I heard that, it occurred to me that there’s a sense in which she’s right.

If you’re someone who shares Trump’s worldview, there are certain things that follow from that worldview. In other words, certain things have to be true, or have to be believed, in order to sustain that worldview. The things that aren’t actually true but nevertheless preserve that worldview are “alternative facts” — that’s what Conway was getting at, whether she knew it or not.

The conservatives use those alternative facts all the time, and so does Trump. If he’s talking to his base, he’s talking to people who have already bought into a picture of the world, and his job is to tell them things that confirm that picture — and he knows they’ll believe it for that very reason.

I think we have to understand “alternative facts” in this way, and understand that when Trump is lying, he’s lying in ways that register with his audience. So it may be lying, but it’s strategic lying — and it’s effective.
With this in mind, I wanted to also note this part from Saturday Night Live's open, where Kate McKinnon played Faux News host Laura Ingraham, and explained to us to the concept of "feel facts".
“Later on in the show: Celebrities in California are whining about wildfires while our heroic president is under constant attack from rain,” [McKinnon] said [as Ingraham]. “But first, let’s talk about the rampant voter fraud that allowed democrats to literally steal the election. Some have claimed that suburban women revolted against the Republican party. But doesn’t it feel more true that all Hispanics voted twice?”

The Ingraham character added them to her list of “feel facts,” which “aren’t facts but they just feel true.”


What the SNL skit and Lakoff's comments illustrate are reasons why we shouldn't waste our time arguing with people weak enough to still support Trump or get their "facts" from hate radio AM 620/1130/1310. All you can do is to mock them and repeat facts in different frames so that bystanders don't get tricked into thinking that Bagger trash shooting their mouths off actually have a clue.

The sooner we concentrate on the wants and thoughts of the honest 70% of this country that cares about independent facts and results, the better off we will be. And the more likely it will be that we can isolate and diminish the gutless 30% that are left.

Shouldn't we fund public schools vs having constant referenda?

I wanted to catch up on another trend that happened at Wisconsin ballot boxes this November - the increasing amount of school referenda throughout the state that voters approved of.

In addition to the former teacher they chose to be their new governor, Wisconsin voters around the state also chose to raise their own taxes to keep their public schools running.
Wisconsin taxpayers voted to pour at least $1.3 billion more into their local public schools on Tuesday, raising their own property taxes in most cases to pay for it and making 2018 another record year for school district referendums.

Capping an election cycle in which education issues dominated the governor's race, voters approved 77 referendums by school districts asking to borrow money for capital projects or exceed their state-mandated revenue limits to maintain or expand programming. They rejected just five, totaling almost $44 million.

All 23 ballot questions passed in southeastern Wisconsin, totaling $556 million, according to an analysis of data reported by the Department of Public Instruction. Those included a $124.9 million ask by the Wauwatosa School District — the second largest referendum Tuesday — which is expected to raise property taxes on a $250,000 home by $470 a year for the next two decades.
Wisconsin Public Radio also had a on the numerous referenda, mostly concentrating on the large number of smaller, rural districts that felt they had little option but to ask the voters for more funding in order to survive.
According to the Wisconsin Policy Forum, the increase in rural districts asking for funding help is generally tied to decreases in enrollment. But the state's competitive education landscape could also be playing a role in the increased number of referendums, according to Dan Rossmiller, the director of government relations for the Wisconsin Association of School Boards.

Options like open enrollment and the state's voucher program give students options outside of their school district.

"Districts are finding that they're having to make certain improvements to be more competitive in that competitive environment and keep those students where they currently are," Rossmiller said.
I don’t buy Rossmiller's argument at all. These aren’t college dorms that get spiffier to attract students. The referenda is often going into everyday classrooms and other facilities that are falling apart, along with paying bills to keep the lights on. I think it's more a reflection of 8 years of defunding and devaluing public education by the ALEC-GOP crew that has been running things at the State Capitol.

Where vouchers play into this equation is because of the ALEC/GOP funding mechanism that literally takes away money from the public school district where the voucher student lives, even if the student has never attended a day of classes in public school. I note that Wauwatosa is the Milwaukee suburb that seems to have turned hardest toward Democrats in the last few years, because they know that the voucher scam is wrecking their community's schools and quality of life, while raising their own property taxes in the process.


And all of these factors matter when it comes to keeping their community vibrant and worth living in, which explains why SOS (Save Our Schools) was a common sign I saw in Wauwatosa yards as I increasingly headed to Milwaukee in September and October for the Brewers' playoff run.

This seems like something Governor-elect Evers should fix in his first budget, along with reiterating his call for looser revenue caps, which will lessen the need to go to referendum in the first place. And perhaps we should use some of the $1.6 billion+ in tax dollars that we spend on writeoffs for property taxes associated, and put that money into the classroom and the buildings instead.


Lastly, WisGOPs have spent the last several years trying to starve K-12 public schools into submission. Maybe it's time to reverse that trend and start cutting off these voucher schools from the taxpayer teat. After all, if they believe in competition and "survival of the fittest", maybe they should stop getting so much of our money and get by on their rich benefactors and tuition that can be written off on rich people's taxes.

Saturday, November 17, 2018

Walker re-appears...as the same petty partisan we knew him to be

Our Fair Governor emerged from hiding late this week to talk to the media about his loss in a bid for a third term, and the plans that his fellow WisGOPs have floated which would prevent successor Tony Evers from being able to do the same things Scott Walker could.

2 days after claiming he stayed quiet in the name of “civility”, Walker showed on Thursday he was still the same scummy, partisan lowlife that he’s been for all of his 25 years of grifting off of Wisconsin taxpayers. Not only did he indicate he was fine with taking away some powers from Gov-elect Evers, but Scotty came up with a typically lame excuse for doing so.
Walker acknowledged the changes being considered could give lawmakers more appointees to boards for the state Building Commission and the Wisconsin Economic Development Corp. — which would dilute the influence of the governor’s appointees to those boards.

“Most of what’s likely to come up between now and Jan. 7 is more of a reflection of codifying the practice that we’ve had in the past,” Walker said.
What the hell is he talking about? Walker and WisGOP have consolidated power into the Governor’s Office and his lackeys at the Department of Administration for the last 8 years. The only way you “codify” that is by allowing Evers also take advantage of that consolidation of power, and appoint his own people to those boards.

What WisGOP (and apparently Walker) want to do is the OPPOSITE of codifying what was done in the Age of Fitzwalkerstan. They want to make Evers operate under different rules than Walker did, with less direct power and oversight to mold these organizations as he sees fit.

Sorry Tony, only I get to do these things.

We can debate whether de-centralizing some of these powers would be a good or bad thing (it was sickening how the WisGOP Legislature allowed Walker to grab so much control over the last 8 years). But that should be done after Evers takes office, because perhaps Tony will propose some “good government” reforms that should be put in place as well. The fact that WisGOP isn’t asking for Evers’ input reveals this to be a brazen power play.

And the power play got even more blatant and disgusting Thursday, when GOP Legislative leaders said they wanted to move Wisconsin’s 2020 presidential primary for reasons that had nothing to do with the presidential race.
Republicans for a year have been concerned about the 2020 state Supreme Court race because it will be held alongside Wisconsin's presidential primary — when Democratic turnout is expected to far outpace Republican turnout because Democrats will be deciding who in their party will challenge President Donald Trump.

That turnout imbalance could spell trouble for Justice Daniel Kelly, whom Walker appointed to the high court in 2016.

Legislative leaders have been discussing moving the April 2020 primary, possibly to March of that year. No decisions have been made on whether to advance the plan, according to four Republicans familiar with the discussions …

Moving the presidential primary would tack on costs for taxpayers. Clerks would need to hold three elections that spring — a February primary for Supreme Court and local elections, an April general election for those races and the presidential primary.
But as we’ve seen with redistricting and lawsuits against settled laws like the ACA and marriage equality, when has running up taxpayer costs for partisan politics stopped WisGOP before?

Cut from the same scuzzy cloth.

I also can’t let go of this line of bunk from Governor Dropout that appeared in the Wisconsin State Journal’s summary of his word salad.
Walker said Thursday that he finds it odd that a nonpartisan election, such as the Supreme Court election, would be held on the same date as a partisan election, such as the presidential primary.
Oh, that’s news to you, Scotty? Because it’s no different than it was in 2016, when appointed Walker/GOP hack Rebecca Bradley won her Supreme Court race against JoAnn Kloppenburg on the same day that voters in both parties chose Bernie Sanders and Ted Cruz in the presidential primary.

I didn’t recall your concern back then, likely because AM talk radio goosed up enough sheep so that 100,000 more people voted in the GOP primary than the Dem one, which helped Bigoted Becky win a 10-year term. And by the way, why do you guys care so much about rigging elections for “Justice”? Afraid of what an honest judge that’s not owned by WMC, the Federalist Society and other right-wing oligarchs might find?

This statement from our soon-to-be ex-Governor was also rich.
Walker also suggested the changes he and lawmakers adopted the last eight years may have left them with little more to do.

“We’ve been such reformers, I may have reformed myself out of a job,” Walker said.
Oh, “reformed your way out a job”? Is that what you call 7 straight years of bottom-half job growth (including 42nd in the US over the last 12 months measured), underfunded schools that are closing and/or in need of continual referenda, a massive increase in both Scott-holes AND wheel taxes to fix those Scott-holes, and unprecedented corporate welfare and corruption?

Don’t flatter yourself, Scotty. You earned your rejection on November 6. And the garbage you tried shelling out on Thursday shows that have learned nothing from it except to double down and spin and grift some more.


The way Walker and his fellow WisGOPs are acting in the wake of a clear statewide rebuke means they need to be exiled from any power at the Capitol for all of the 2020s. It’s going to be a long road back to restore Wisconsin from the Banana Republic(an) place it has become under GOP rule, and it’s clear that WisGOPs will not be partners in that restoration. Gov-elect Evers better realize that, too.

Thursday, November 15, 2018

More job losses in October. Maybe a new, less crooked Guv can make us "open for business"

Even though Scott Walker has less than 8 weeks left in his Reign of Error, it still doesn’t mean there isn’t more data coming in to judge his record as Governor. This includes the most recent Wisconsin jobs report, which was released on Thursday.
In brief, seasonally adjusted estimates show:

• Place of Residence Data: Wisconsin's preliminary seasonally adjusted unemployment rate in October remained unchanged at 3 percent. This was the 9th straight month that the state's unemployment rate stood at 3 percent or less. Earlier in 2018, Wisconsin's achieved its lowest unemployment rate in the history of the state, 2.8 percent. Wisconsin's labor force participation rate was 68.4 percent, more than five percentage points higher than the national rate of 62.9 percent.

• Place of Work Data: From October 2017 to October 2018, Wisconsin added 32,000 private sector jobs and 20,000 manufacturing jobs. Both increases were deemed as statistically significant by BLS. Since 2010, Wisconsin has added 53,700 manufacturing jobs and 32,400 construction jobs.
Notice what’s not mentioned? The actual jobs numbers for October. And even though there’s no campaign left to complement, Scott Walker’s DWD is still working as a PR outlet. Because they don’t want people to see these numbers.

The unemployment rate stayed at 3.0%, but it wasn’t because of any kind of job growth. Instead, it was because Wisconsin lost both people working and those available for work in October.

Household survey, October 2018 Wisconsin
Employed -6,700
Labor Force -6,700
“Unemployed” 0

Payrolls also reflected this decline, both in October, and in the revisions for the prior month.

October 2018 jobs, Wisconsin
All jobs -3,500
Private sector jobs -1,600

Sept 2018 revisions, Wisconsin
All jobs -3,000 (-4,100 total)
Private sector jobs +1,300 (+400 total)

Put this together with private sector losses in August, and the record of the last 3 months is bad.

Aug 2018 – Oct 2018 jobs, Wisconsin
All jobs -6,000
Private sector jobs -1,900

These new numbers mean that right on the eve of last week’s election, the Walker jobs gap was around 155,000, and we were STILL below 250,000 private sector jobs since Walker took office – 4 years later that Scotty claimed we would get there.



Speaking of our Fair Governor, how fitting that this jobs report comes out on the same day that Walker came out of hiding to ask for one last corporate handout before he leaves office.



Yes, because after 8 years of underperformance, the last thing we need is for you to hang one more economic albatross around the necks of Wisconsinites on your way out the door.

Sorry Scotty, you failed us enough over the years, which goes a long way towards explaining why you’re searching for your first real adult job these days.

Wednesday, November 14, 2018

Interest rates up + US deficit up + inflation up (for now) = not a good situation

Yesterday had the release of the first US Treasury Statement of the new fiscal year, and it produced a nice round number that headline writers could easily lead with.
The U.S. recorded a $100.5 billion budget deficit in October, an increase of about 60 percent from a year earlier, as spending grew twice as fast as revenue.

The deficit widened from $63.2 billion in the same month last year, the department said in an emailed statement on Tuesday. October marks the start of the U.S. fiscal year.

Receipts totaled $252.7 billion last month, up 7 percent from a year earlier, while outlays climbed 18 percent to $353.2 billion, according to the department.
Some of this is a bit misleading, because payments were a little screwy in September due to the 30th (and the end of the Federal Fiscal Year) happening on a Sunday. If you dig into the Congressional Budget Office’s Monthly Budget Review for October, it shows the effects of this calendar trick.
The government recorded a deficit of $98 billion in October, CBO estimates, about $35 billion more than the shortfall recorded in the same month last year. A shift in the timing of payments affected the deficit in October 2017; if not for that shift, the deficit last month would have been $9 billion less than it was in October 2017.
And sure, the October 2017 numbers were also goofy due to weekends, but you get the idea. While the toplines are bad, we’re not likely to have a 40% increase year-over-year in the deficit for the entire 2019 Federal Fiscal Year.

But the deficit certainly is continuing to go up, and bond investor Jeff Gundlach notes that our rising budget deficit is outrunning the increase in the economy caused by deficit spending. He notes that this is making interest rates rise to keep pumping the money out and to slow down the economy.
“When the deficit goes up, it’s stimulative to the economy. That’s good in the short term, but it’s borrowing from the future,” he said.

On the chart, the blue line represents the Fed funds rate and the red line is the deficit. During the early 2000s, the red line and the blue line moved in the same direction. To put it another way, when the blue line goes down, the means the Fed cut rates, and the deficit expanded. Part of that can explained by a lousy economy that lowers tax receipts and increases government outlays, but there’s also generally some stimulus in there to help the economy pull out of that recession. The red line goes up during good a good economy because the deficit is supposed to shrink. The red line going up changed in the aftermath of the global financial crisis when deficits shrank while rates remained low.


“When the Fed started raising rates, very strangely, the deficit started rising because, of course, of the policies put in place in the aftermath and prior to the election. Now we see we are raising rates again while the deficit as a percentage of GDP is rising.”
Because our deficit keeps going up in a time of economic growth, Gundlach says the US economy is heading toward a self-perpetuating cycle where the rising interest rates themselves also increase the deficit by increasing the cost required to pay off bondholders.
“If you look at the screen of the yield curve today, the yield curve, it basically has a three-handle across the board and so those bonds, when they mature, will have to be replaced unless we have a budget surplus, which obviously is not the trend presently with higher cost debt. And so we’ll have yet another perhaps $150 billion or so of interest expense five years from now if interest rates are raised along in sync with the Fed’s stated plan to continue to hike rates pretty much at a quarterly rate.”...

“This is not a good situation,” Gundlach said, before adding, “It seems like we’re on a suicide mission by increasing our debt and increasing the cost of that debt simultaneously. I’m quite sure this is going to be an issue that’s going to be important within 5 years at the absolute maximum.”
One thing that could stop these increases in interest rates is if inflation gets held in check, as that would hold down the real rate of interest, which hasn’t changed all that much in the last 2 years because year-over-year inflation has doubled from 1 to 2.5% over the last 2 years.


Speaking of inflation, we just got a report today on the October Consumer Price Index. While that report showed a slightly-hot 0.3% price increase for last month, that included a 3% increase in gasoline that has sharply reversed since then (if you’ve gone to the gas station recently, you’ve likely noticed). Because that 0.3% monthly rate does not seem like something that will continue in the near future, maybe the concern about raising interest rates high due to keep up with rising inflation might subside in the near future.

Also in that CPI report, it showed food prices already have been dropping (down 0.1% in October), partially due to the surplus of products that are being kept in the country due to the Trump Trade Wars. That’s not good news for farmers (as evidenced by the 1,100 dairy farms that have gone under in Wisconsin since the end of 2016), but combine that with the decline that’s starting to happen with gasoline, and it likely will mean flat if not negative inflation for the coming months.

Of course, our deficit will still be putting upward pressure on rates, since we have to get more of our debt sold, as bond trader Gundlach noted this week, and that doesn’t seem likely to go away any time soon. And I wouldn’t count on massive economic growth to reduce that deficit, not in a time of sub-4% unemployment and real hourly wages declining in October (granted, it was only down 0.1% and 12-month real growth was up to 0.7%. Party hats!).

Which makes me wonder when the second shoe drops, and it’s not just crops and now oil and gasoline that have overproduction problems that deflate prices, destroy profits, and lead to layoffs. Logic tells me it’s sooner than later, and when it hits, we won’t have much fiscal flexibility to get out of it without a lot of pain.