"There are only three ways to meet the unpaid bills of a nation. The first is taxation. The second is repudiation. The third is inflation."
- Herbert Hoover
In his criticism of FDR’s New Deal, the former president (although unable to account for the additional wartime spending that would soon follow) was right on the money. Although listed last, inflation is always the first choice of monetary sovereigns.
From 1946 to 1970, federal debt as a percentage of GDP fell from 119% in 1946 to 31% by 1970. During this period of deleveraging, negative real rates are estimated to have provided a subsidy to the US government equivalent to ~2.3% of GDP per year, or, in total, interest cost savings equal to ~20% of tax revenues.
With the federal debt burden surging to war-time levels during the pandemic, inflation is the priority of those in the ivory towers at the Federal Reserve. Although in a constant battle against the deflationary forces to debt, demographics, and technology, they strive to usher in a new prolonged period of financial repression whereby wealth is harvested through certificates of confiscation otherwise referred to as treasury securities.
Although bondholders in the post-war period were captive to capital controls, the same is not true today, evidenced by the declining share of foreign purchases of U.S. treasuries and the increasing share of treasuries held by U.S. financial institutions. Whether held by foreigners, pension funds, or banks, the silent tax on savings is the same. Is there a confidence threshold whereby a vicious debt spiral ensues? Hopefully we never find out.
Back to the Payments/Macro Grind…
With inflation remaining in focus, we continue to favor the payments sector for the globally diversified and real-time inflation-hedged nature of revenues, particularly the open-loop card networks Visa (V) and Mastercard (MA) which have sold-off in the past few weeks on concerns over the delta variant.
Both V and MA have excellent track records under economic regimes characterized by decelerating growth and accelerating inflation. Just take a look at the charts of the day.
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Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.20-1.39% (bearish)
UST 2yr Yield 0.19-0.26% (bullish)
SPX 4 (bullish)
RUT 2125-2227 (bearish)
NASDAQ 14,291-14,973 (bullish)
REITS (XLRE) 45.66-47.16 (bullish)
Tech (XLK) 151.16-156.14 (bullish)
Utilities (XLU) 66.90-69.68 (bullish)
Energy (XLE) 46.09-50.18 (neutral)
Shanghai Comp 3 (bearish)
Nikkei 27,167-27,906 (bearish)
DAX 15,673-16,050 (bullish)
VIX 14.07-23.17 (bearish)
USD 91.98-93.45 (neutral)
EUR/USD 1.167-1.183 (neutral)
Oil (WTI) 63.13-70.32 (bullish)
Nat Gas 3.74-4.21 (bullish)
Gold 1 (bullish)
Copper 3.92-4.34 (neutral)
Have a great day out there,
Drago Malesevic
Financials analyst
