Debt financing getting out of control?

Abraham George Macro View

The question everyone should be asking is - will the massive investments in growth and recovery plans produce enough real real growth after adjusting for inflation? Let’s see what is likely in store. Biden was quick to announce an “America rescue plan” for 1.9 trillion dollars on top of the 900 bio dollars that has yet to be spent from the late Dec aid package.

Then there is the climate action economic transformation plan. It is expected that the US will allocate a trillion dollars or even two trillion dollars. This is not an American idea. It is a global plan. Trump was opposed to it during his presidency and Biden most likely is going to reverse all that.

Basically central banks are going to keep on buying their own debt to spur growth. How all this will end up is not a concern now. The US already has a 27 trillion deficit for a 20 trillion economy. Several more trillion dollars will be added to the deficit. The idea is to increase the nominal value of the economy through higher asset prices and devalue the debt - paying it back with less valuable dollars.

With this mix of fiscal and monetary policy, the first reaction should be that currencies should go lower. Currencies are valued relative to one another. So if everyone is trying to do “beggar thy neighbor” policy currencies pretty much remain unaffected. While the dollar is in a bear trend there is no much volatility. This can all change if inflation starts to pick up in US in a noticeable manner.

Equities

The Dow rose to a new high on Jan 14 ( 31,224 ). However it was not confirmed by the S&P 500 where prices remained under 3827 the high on Jan 09. These non-confirmations are signs of fatigue and exhaustion and it could be that we have seen a top since the rise from Jan 04. I will have more detailed analysis on this in the next report.

Bonds

Bonds are playing to script. Markets could have topped at 169^22 or the counter trend rally can take it even up to the lower 173 handle. Whatever it is the bigger play is to the downside and it could be a very strong and swift move.

Euro

As suggested the Euro continued to trade lower but think there is more downside potential. After some consolidation expect to see a move down to the 1.1600 handle.

Gold

Gold’s move to 1959 on Jan 06 was a corrective move. The move down since to 1819 is impulsive. Think gold should now remain capped under 1864 the Jan 12 high and decline below the 30th Nov 2020 low of 1765.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.