Trump's Trump Card - Why Interest Rates Will Only Go Lower Once He Takes Office

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Anyone betting rates will rise over the course of Trump's presidency is betting against the Fed's observable history since 1981 and broadly since WWII. Betting the Fed will hike into the worst population and demographic trends in the nation's history (and world's history...particularly ex-Africa). Betting that the Fed will reverse its effective policy of rate cuts while Republicans are in office. Betting the Fed will raise while all net buyers of US Treasury debt outside of America have entirely ceased buying. Betting as Trump lowers taxes and ramps up spending (also known as deficit spending) that the Fed will make this more expensive, not less. Betting that housing prices (and the highly interest rate sensitive US economy) will not fall while interest and mortgage rates rise. In short, those betting on rate hikes beyond this December's hike are likely to be wiped out. Here's why...

There are two types of US Federal debt issued by the US Treasury to pay for what America's POTUS & Congress deem "we" want now but are unwilling to tax ourselves to pay for. These are (1) US public debt (also known as "Marketable debt" since these bonds are traded in the open market) and (2) intra-governmental debt or the debt that the Social Security surplus and like programs are mandated by law to "reinvest" the surplus into until it is needed. The chart below shows the progression of the two since 1981.

What you may notice is the sharp upturn in the public debt since 2008 and the deceleration beginning to take place in intra-governmental debt as sources of surplus revenue are drying up and will be turning to outright deficits over the next decade. Simply said, 100%+ of all US debt issued from here forward will be marketable debt.

The primary driver of the Intra-governmental bond buying...the OASDI (Old Age and Survivors Disability Insurance trust fund) or more commonly known as Social Security surplus. Below, the blue columns are the annual US Treasury debt purchases and the red line the total holdings of US debt via the SS trust fund. Total holdings will be declining as boomers retire en masse and begin drawing on these "reserves". In short, the governmental buybacks of US debt that soaked up 45% of all Treasury issuance up until 2008 are rolling over and will likely turn to net selling over the next decade.

The annual OASDI surplus (red columns) peaked in 2007 but will run annual deficits indefinitely from here on (below). This is due to the decelerating annual growth of the 25-64yr/old population (blue line) and swelling 65+yr/old population (grey line). The impact of the collapse of the growth among the working age population and swelling elderly population means not only will intra-governmental trust fund not buy Treasurys but greater marketable Treasury issuance will be necessary to cover the shortfall.

The chart below shows Treasury marketable debt (red line) vs. the Federal Funds interest rate (columns, quarterly). In the boxes the change in marketable debt per interest rate cycle vs. full time jobs creation (net) per cycle...the sharp acceleration of marketable debt and the deceleration of full time jobs creation is very apparent.

The decelerating growth in jobs vs. the surging debt is rather important as it's only through more jobs that a larger economy and tax base is created that is hopefully sufficient to pay back the debt (LOL) or more likely simply service the ever larger debt load. Absent the growth in jobs and tax base, the only other option to constrain the debt service is to lower the Federal Funds rate (think NIRP or negative interest rates wherein the largest corporations are paid to take loans and the government pays itself to issue new debt and banks charge savers to hold their money).
Marketable Treasury Debt as of December 1, 2016...$14.4 trillion

  • 1776-->2007 +$5 trillion (35% of current total)
  • 2008-->2016 +$9.4 trillion (65% of current total created in the last nine years).
    • The Obama administration and Congress during his 2 terms are presently responsible for creating 56% of all US marketable debt...and will likely be 57% by Trump's inauguration.

So supposedly, while the lawfully mandated sources of buying have run their course and turn to net sellers, the Fed will raise? While housing prices and the taxes generated from those homes is entirely dependent on ever lower mortgage rates, (outlined HERE), the Fed will raise? While GDP growth is severely declining absent the new federal debt and while foreigners and the Fed itself have ceased buying (outlined HERE), the Fed will raise? While the only remaining buyer of marketable US Treasury bonds is the US public (institutional buyers like domestic pensions, domestic banks, domestic insurers, etc....outlined HERE) and issuance is set to continue rising, the Fed will raise rates?

The chart below highlights annual GDP minus the annual growth in federal debt to achieve that "GDP growth". Plainly, GDP is contracting absent the surging growth in federal debt. Against this backdrop, the Fed will raise? The last eight years were abysmal and 2016 the third worst year in history (this even assumes Q4 GDP comes in at a relatively strong 2.5%).

Bringing it home for Americans, the chart below shows US GDP change vs. total credit market debt owed vs. federal debt (all three showing change per period). The chart below should be setting off warning bells and sirens...without a swiftly growing consumer base, private parties are fast reducing leverage as a means to increase production (CAPEX) and even obscene growth in federal debt creation are not resulting in higher GDP growth.

Despite the US population more than doubling since Eisenhower took office in 1953, the annual growth rate peaked under Reagan (total) and Clinton (as a %), and has been decelerating since (below).

However, the make-up of that growth (above) has dramatically reversed itself. Regardless who was selected as president, over the coming eight years, 80% of the net population growth will come from 65+yr/olds vs. a maximum (during Clinton's term) of 85% coming from the working age population.

The reversing make-up of population growth from the peak ratio under Clinton to the upcoming bottom under Trump (particularly in the second term) is hard to miss. And all these numbers assume continued current levels of immigration; if that continues to slow (or mass deportations occur), the growth among the working age population will be significantly lower while the population growth of 65+yr/olds will be relatively unaffected. If you wonder how the Donald became president, look at the population / demographic change during Obama's last term and the imminent demographic / population changes should mean it's no surprise why Trump will likely win again in '20.

By the way, since a minor FFR increase during President Eisenhower's term, Federal Funds Rates have been raised during every Democrats presidency and lowered during every Republicans term (on a net basis, chart below). Interesting that the Federal Reserve has acted to slow economic activity during all Democrats' terms and goosed activity during all Republicans' terms. This may be as much to do with the make-up of Congress and general economic cycle timing as the president's party affiliation, but I'm simply noting R's have been in office when the interest rate tailwinds have blown and D's faced interest rate headwinds. The chart below shows the changing FFR's and Federal debt per presidency.