Sigh, Chaos Continues

Although I have sympathies for economic commentators who want to engage in normalcy bias, doing so in the current environment requires sticking your head into the sand and ignoring the obvious risks to the macro outlook. Maybe if you are picking small cap stocks you can try to ignore the chaos emanating from the White House, but if you are opining on government bonds you cannot ignore the President of the United States floating the idea of selective default on U.S. Treasurys.

I really do not want to turn this into a political blog (I had one enraged Canadian Conservative complaining in an obnoxious fashion about my correct observation that Trump’s publicly floating the annexation of Canada has been damaging to Trump’s right wing allies in Canada), there is no avoiding it. There is no point in publishing an inflation primer if the government in my largest reading market starts making up inflation data, or a banking primer if the government decides that bank regulations are too “woke.”

Run the Government Like a Business - Selectively Stiff Creditors

It is very clear that the new American regime has decided that it is going to follow the “best practices” of the private sector and selectively not make legally mandated payments on the basis of “efficiency,” where “efficiency” is determined by the algorithms controlled by the President’s grand vizier. The President even floated the idea of selectively not making some debt payments last night, although that may have been walked back by functioning adults within the administration later.

Although I expect that U.S. Treasurys will remain the benchmark U.S. dollar cash curve, that curve should start to incorporate a default risk premium. (Many economists like to blab on about using swaps as a benchmark curve, as many economists really have a hard time grasping that bonds consume far more balance sheet than swaps, and thus bond pricing and swap pricing are apples-to-oranges, no matter what Finance 101 textbooks say.) Since only an idiot would buy default protection from counter-parties that would be vapourised by a U.S. government default, using CDS to gauge default risk is another “Finance 101-ism” that is probably not giving a meaningful read on default risks.

Although I doubt the Administration would stiff U.S. creditors, I would certainly not be a happy analyst recommending holding Treasurys if I worked for a foreign bond manager.

It is very much unclear to me how this “selective default” on payments legally mandated (not just Treasury security payments) by Congress will work out. Although some member of Congress might be happy to enact their wish list to slash government without having their votes attached to the laws, it is unclear that Congress going the way of the Roman Senate after the demise of the Republic and the rise of the Empire is a plausible outcome. The rise of the Roman Emperors was not just because they had the Roman equivalent of cool memes — the Republic had previously ripped itself to shreds in a bloody civil wars. (I recommend Bret Devereux’s blog — https://acoup.blog/ — as an antidote to the widespread disinformation about the Roman Republic and Empire. Not sure which articles best describe the demise of the Republic, most are about how the Empire and Republic functioned in practice, as opposed to modern fantasies about them.)

Tariffs on Aluminum and Steel

Tariff Week is back, with tariffs on steel and aluminum floated by the President. (Canada uses the American aluminum instead of the British aluminium.) Given the importance of Canadian steel and aluminum exports (we have lots of cheap hydro-generated electricity), my assumption is that if they come into effect, there will be selective Canadian counter-tariffs on American products. Since the Canadian approach is to match the dollar value of affected exports, the list of Canadian targets would be a lot smaller than the previous list based on across-the-board 25% tariffs, but I would guess bourbon is toast given the ease of targeting it and the ready Canadian substitute (rye).

If enacted, this will cement the growing anti-American boycott by Canadian consumers. It is nearly impossible to boycott American food brands since Canadian output tends to be branch plants owned by American parents, but Canada could revert to the pre-1980s situation where American firms mainly get access to the Canadian consumer market via branch plants.

Economic Data Next to be Targeted?

It would be incredibly stupid and counter-productive for the Trump regime to launch an outright attack on economic data production. Nevertheless, based on other actions, it is unclear that this observation will matter.

Fudging politically sensitive data like the unemployment rate might be seductive for Trump, but it presents a logistical problem. You cannot just lower the published unemployment rate, you need to doctor the entire Household Report in order to generate an internally-consistent data release. If you did not do so, people could back out the “real” unemployment rate by looking at the rest of the report. Meanwhile, doctoring the entire Household Report would then rapidly require doctoring the survey of firms so that the numbers remain consistent over the medium term. (They can directionally diverge over the short term.) And once you do that, you need to start to doctor the national accounts so that output/labour hour (productivity) does not collapse. That is, you have to make up the entire interlinked set of economic reports.

A more likely outcome is that budgets will continue to be starved and employees cut, and so more and more peripheral data sets disappear. It is entirely likely that demographic breakdowns of data might be purged since they are “woke” or “DEI” or whatever the cranks call it. It is extremely likely that internet surveys or AI output will be used to replace existing methodologies. “New and improved” indicators might be created to be used by American state media, while the business press can just use the older ones (that are probably degrading in value).

Although doctoring the CPI would be one way to lower future cost-of-living linked payments, doing so very explicitly would fracture the conservative base and probably only generate limited savings when compared to the options opened by selective default.