Thoughts From The Divide: All Time High
All-time highs are often telling macro signals. Is it possible there might be a connection between the recent ATHs in Bitcoin and long JGBs? Some reports pointed to the US credit downgrade and Trump’s tax bill igniting fiscal worries. First of all, no macro trader ever sold a bond because of a credit downgrade and second, given S&P and Fitch had downgraded long before, it’s very hard to think of it as a surprise. So ignore the rating nonsense and just focus on the deficits. The issue is the scale of public sector deficits relative to private sector savings, and it’s hardly a secret. Some might pretend that the problem is specific to the US, but it isn’t, and that just makes the problem bigger. Government deficits are high all over the developed world, reflecting adverse demographics, internal political division, and ongoing geopolitical arm-wrestling.
High rates just make this problem worse (fiscal dominance). Which is why beauty might be in the eye of the beholder when it comes to Trump’s “Big Beautiful Bill” passing the House. Naturally, the Senate will water it down, but as it stands, it is estimated to add about $600bn of fiscal juice and take the deficit to 8.2% from the current 6.2% of GDP. For perspective, Argentina reduced its deficit from 5.2% in ‘23 to a surplus of 0.9% in ‘24.
But this picture is misleading. We won’t know the net fiscal position till we know how much revenue will be raised from tariffs, and we certainly won’t have clarity on that on the conclusion of the budget reconciliation process. Latest indications are that markets may have called the all-clear too soon. China seems to think the US has already breached the Geneva agreement. That suggests that whatever grace period we have now will not last. Could the WH have negotiated in bad faith, calling a temporary truce just to punt the tariff question till the “Big Beautiful Bill” is done? That is a very cynical take! Either way, if tariffs generate $300bn of revenue, markets might easily have overestimated the stimulus associated with the “Big Beautiful Bill”, even if they also end up underestimating the near-term inflation trajectory. Markets seem to be operating under the impression that Liberation Day was just a terrible dream, whereas it might end up being a recurring nightmare.
It’s just too soon to say, even if market pricing begs to differ. The impact of tariffs on inflation is still to feed through, and retailers do not seem particularly receptive to Trump’s “Let them eat tariffs” suggestion. As for what the tariff end-game is, arguably the WH doesn’t have as much room for maneuvre as some might think. As a final observation, we thought Brad Setser had a good take on why tariffs didn’t push the up dollar as some had expected.
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