QUOTE OF THE WEEK
“Character is the real foundation of all worthwhile success.” – John Hays Hammond
There’s not much new to report on the economic front. The data is still pointing down. Our investment partner Omega Squared is saying we are still in the Eminent Recession period. They think the recession is getting closer and based on the record inversion of the yield curve, the recession looks like it will be a deep one.
The calculation of the yield curve is derived by subtracting the yield on the two year Treasury from the yield on the 10 year Treasury. The current yield on the 10 year is 3.54% as of today and the yield on the 2 year is 4.08% as if today, thus the yield is negative 0.54%. A negative yield curve is one of the most accurate predictors of a coming recession. Think of it this way. Assume you were a bank and using just the Treasury yields, you would have to pay depositors 4.08% and you would be loaning out money at 3.50%. You would lose money on every loan. So, you wouldn’t make loans. As I stated in a prior letter, if the banks aren’t making loans, the economy will slow down.
The really big issue is the coming debt ceiling debate. We are the only country on the planet that has this stupid issue. This should be a non issue. The Congress has already approved the spending of the money, so just pay the bills.
It is hard to say what the ramifications would be if the President and Speaker of the House can’t come to an agreement. The talk of the U.S. defaulting on the U.S Government bond debt I am sure won’t happen. That would be a disaster of unbelievable consequences. The government has plenty of revenue to pay the interest on U.S. Bonds. Most likely the U.S. would stop paying its bills and some citizens wouldn’t get their Social Security checks or Veterans benefit checks.
Another option would be for the President to exercise a provision of the 14th Amendment which states “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection of rebellion, shall not be questioned”.
Were Biden to invoke the 14th Amendment to allow Treasury to borrow above the debt ceiling to pay the nation’s obligations, it would almost certainly prompt a constitutional crisis and swift legal action.
This debt ceiling crisis is an unforced error of our own making.
SOURCES; CNN, PBS. Hedgeye