9. The Dollar’s Decline
The eruption of war in the Middle East caused the yield on the US ten-year bond to decline for two days from almost 4.8% to 4.55%, as there was a flight to safety. However, it has gone up to over 4.6% today. While the two-year bond hovers above 5%. What is that telling us? The inversion will continue to flatten out.
The CPI was slightly higher than expected but not enough to disturb many stocks in an uptrend. As the ten-year bond has moved up above the mid fours in yield (we called for 5.25% for the ten years on Sept. 8th), Fed governors have begun to recognize that it is doing the work of slowing the economy that the two-pronged Federal Policy (raising overnight rates & allowing debt to run off the balance sheet at a huge cost) is dispatched to do. Our Sept 1 call for a Fed hike was wrong, but the 10 yr. bond increase is doing the contractionary work.
For a moment, let’s ignore the fact that the explosion of fiscal spending from 2020-2023 (which is still unfolding) was facilitated by the Federal Reserve's artificially low rates and excessive printing of dollars, creating not only inflation but a much larger problem. Although it is good that the House will finally go back to considering funding the 12 agencies of the Federal Government separately as law requires rather than throw them all in an Omnibus bill as has been done for 27 years by ’25, that is merely the tip of the iceberg.
However, starting now until 2026, cash is ascending to the throne one last time and will be King in a liquidity scarcity that is returning with a vengeance, tempting the Fed to print more. We are entering a period where stock picking in the financial markets will prove essential. By the end of 2024, it will be abundantly clear that for the US to maintain its solvency as a nation, three things must be done. First, we will have to reduce our mandatory spending. Soon the interest on the debt will be approaching $1 trillion. That means that Medicare, Medicaid, Social Security, and the 100 welfare programs will have to be reduced by 20%-25%; it is not optional. Second, revenue will have to be increased, but in a manner that causes minimal disruption to productivity (abolish all deductions, including foundations, leave the family deduction & put the whole system on an 18% income tax). This will minimize half a trillion spent on avoidance fees. Lastly, we will have to reduce expenditures among the 12 agencies.
If all three of these things are done timely and we avoid war, we will postpone the dollar's decline. However, it is noteworthy that neither Mr. Trump nor Calamity Joe Biden are talking about reductions in entitlements. Although DeSantis and Ramassamy have mentioned it.
Have a blessed week!
Tony Christ