April 18, 2011
“Negative Outlook”
This morning I’m watching the markets absorb S&P’s newly announced “negative” outlook on the US debt. I don’t see Obama’s plan helping, but rather just kicking the can down the road. How? By claiming that “creating a plan to solve the problem” is enough, but then delaying the actual fix until after the next election. That behavior, so typical of politicians, is a millstone around our own necks.
By the way, when Congress reconvened this January, I put a trade on my personal account that the yield curve would steepen. That is, a “long” position on short-term US Treasury debt and a “short” position on long-term US Treasury debt. Why? My belief was that the US government would do everything possible to keep borrowing costs low until at least the 2012 election. Simultaneously, that the federal government would use low borrowing costs as an excuse to fail to rein in entitlements, thus driving the federal deficit to unsustainable, long-term levels. Historically, in other markets, that either requires planned inflation or causes a credit downgrade in debt. Either way, the yield curve would steepen dramatically.
I wish I was wrong in that trade, and I wondered if the House’s “Ryan Budget” might have pushed it the other way. But so far I’m seeing monetary and political history repeating itself.
