New US Fed Chair Testifies – US Debt Unsustainable

Last night saw losses across the board in the US as the Dow dropped 300 points, the S&P500 down 35 (1.27%), bonds down further (and yields up again), and even gold and silver were down $15 and 26c respectively.  The only thing up was the USD and that softened the AUD spot gold and silver falls nicely.

Why?  The US Fed’s new Chair, Jerome Powell, gave his first testimony before Congress and it was decidedly hawkish but also forewarned the consequences of this latest US debt binge.

Powell talked up the growth in the economy and inflation and maintained a stance of continual rate hikes and unwinding of their massive balance sheet, leading some to believe there could be as many as 6 or 7 hikes this year compared to the 3 or 4 the market had priced in.  It was an interesting stance and was incongruous with coinciding data showing a sharp fall in durable goods, housing investment, and the Advance Economic Indicators leading the Atlanta Fed to yet again drop their Q1 GDP forecast to just 2.6%, half that of just a month ago and hardly confidence inspiring.  It seems already rising rates are playing havoc with the property market and investment.  

Tellingly too he said "the US is not on a sustainable fiscal path." and “there could come a time when the public, the global debt-buying public, would come to the view that we either weren’t prepared to honour our debts or that we couldn’t service them,”  That’s called a default folks.

Markets reacted badly to the prospect but got little comfort that he cares as he bluntly stated market moves weren’t at the centre of his “dashboard”.

You could interpret this that he understands rising rates (as has preceded every sharemarket crash in the last century) will likely cause a market crash but it just has to be done.  Turn ‘dovish’  and ease and the ‘everything bubble’ just gets bigger and the pop gets more devastating or stay ‘hawkish’, take the medicine and deal with the consequences now.

This happens soon after the 2012 Fed (FOMC) Meeting transcripts were released quoting the now Fed Chair saying:

“I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.”

How incredibly prophetic…