Biden’s Build Back Better Act May Add $3 Trillion To The Federal Deficit (And Cost $4.73 Trillion)

Call it “The Letter That Phil Swagel Wrote.”

The letter from Phil Swagel, Director of the Congressional Budget Office, sent a letter to Congress stating that

“The Congressional Budget Office and the staff of the Joint Committee on
Taxation project that a version of the bill modified as you have specified
would increase the deficit by $3.0 trillion over the 2022–2031 period.”

In short, members of Congress asked the CBO “What would happen if the programs in the bill would be made permanent (which they almost always are made permanent). The result? The Letter That Phil Swagel Wrote: Federal Deficits would increase by $3.0 trillion over the next 10 years.

The Center For A Responsible Federal Budget is even more glaring. The permanent cost of Build Back Better is $4.73 trillion … and a deficit of $3.01 trillion.

Here is all 2,466 pages of the Build Back Better Act (or Build Back Deficits Act).

The Penn-Wharton Budget Model estimates that — if Congress follows White House policy to make most provisions permanent — then Build Back Better will reduce the long-term GDP by 2.8 percent, reduce wages by 1.5 percent, and reduce work hours by 1.3 percent. The only thing it will expand is government debt, by 25 percent.

Build Back Badly?

Bitcoin Retreats 20% From All-Time High as Risk Assets Slump (Dow Retreats Almost 1,000 Points, Gold Advances)

It has been a grim Friday. The Dow fell 900 points, 10Y Treasury yields fell 16.1 basis points and West Texas Crude fell to $68.17.

Bitcoin tumbled 20% from record highs notched earlier this month as a new variant of the coronavirus spurred traders to dump risk assets across the globe.

The world’s largest cryptocurrency fell as much as 8.9% to $53,624 on Friday during London trading hours. Ethereum, the second-largest digital currency, dropped more than 12%, while the wider Bloomberg Galaxy Crypto Index declined as much as 7.5%.  On the other hand, gold rose as cryptos fell, then retreated as cryptos rebounded.

A new variant identified in southern Africa spurred liquidations across markets, with European stocks falling the most since July and emerging markets also slumping.

The Dow is down around 900 points … and look at Europe!

The 10-year Treasury yield is down 16.1 basis points. Most of Europe is down around 8-9 basis points while the UK is down 14.5 BPS.

And West Texas Intermediate crude futures are down to 68.17 from 78.39. No Jen Paski, this isn’t due to Cousin Eddie (Biden) releasing the Strategic Petroleum Reserve (SPR).

Maybe it was all the tryptophan released by eating turkey.

A day to remember.

Post-Thanksgiving Indigestion: Inflation And Another COVID Scares Spooking Markets (Dow Futures Down 777 Pts, US Treasury 10Y Yield Down 11 BPS, Oil Drops 7%)

Thanksgiving has come and gone. But Americans have a lot to be scared about: inflation (turkey prices were up 24% according to the Farm Bureau and a new COVID outbreak B.1.1.529 — has been identified in South Africa.

Gut-wrenching inflation is already priced in, but yet another COVID outbreak (and the possibility of more economic shutdowns, more vax mandates and more stern lectures from Anthony Fauci) are spooking markets.

Down Futures are down 777 as I write this note.

The 10-year Treasury yield is down 11.2 basis points.

And West Texas Intermediate crude prices are down 6.62%.

Joe Biden: “Save the neck for me Clark!”

Thanksgiving Dinner Staples Are Low in Stock Thanks to Supply-Chain Issues And Federal Policies (Foodstuffs UP 36% From Last Year)

Combine vaccine mandates that lower the workforce and the flood of economic and monetary stimulus by the geniuses in Washington DC, and we have a Thanksgiving problem.

The supply-chain crunch is about to hit another part of American life: Thanksgiving dinner.

Supplies of food and household items are 4% to 11% lower than normal as of Oct. 31, according to data from market-research firm IRI. That figure isn’t far from the bare shelves of March 2020, when supplies were down 13%.

For grocery shoppers this holiday season, it means that someone with 20 items on their list would be out of luck on two of them.

Although U.S. supermarket operators started purchasing holiday items early, aiming to avoid shortages, many holiday essentials are already in short supply.

Turkeys are very low in stock. By the end of October turkeys were over 60% out of stock—lower than the same time last year by more than 30 percentage points. A spokesperson for Butterball LLC, one of the largest U.S. turkey processors, said the company has been experiencing similar labor and supply challenges as other organizations and industries.

Even if you can find a turkey, prices on foodstuffs in general are up 36% from last year.

And to get to the grandparents’ house of Thanksgiving, gasoline prices (regular) are up 24.5% from last year.

You can always shop at Neiman Marcus for a half Thanksgiving dinner for … $376 + $32 shipping. Not for the average American, more for NYC and DC elitists like Biden’s OCC nominee Saule Omarova who wants to bankrupt energy companies.

Biden could lower inflation by 1) stop mandating vaccines, 2) stop shutting off energy pipelines and oil exploration, 3) stop spending trillions of dollars other than Social Security, Medicare and defense.

Frankly, Thanksgiving has gotten so expensive due to Biden’s Reign of Error that I am thinking of alternatives to turkey. Like a Jersey Mike’s turkey and provolone sub.

ECB’s Lagarde Sees Higher Inflation; Pushes Back On Rate-hike Bets (ECB Keeps Foot On Monetary Gas Pedal Despite Inflation)

Its the same all over the world … insane central bank policies and resulting inflation.

I have discussed the US Federal Reserve in depth, but its time to focus on Europe’s European Central Bank (ECB) and their President Christine Lagarde.

FRANKFURT, Oct 28 (Reuters) – European Central Bank President Christine Lagarde acknowledged on Thursday that inflation will be high for even longer but pushed back against market bets that price pressures would trigger an interest rate hike as soon as next year.

With central banks around the world signalling tighter policy amid rising prices, Lagarde said the ECB had done much “soul-searching” over its stance but concluded that inflation was still temporary, so a policy response would be premature.

Soul-searching? The ECB is just doing what Powell and the Fed (aka, Jerome Jett and the Blackhearts) are doing. Keeping the foot on the monetary gas pedal in the face of inflation.

Let’s start Eurozone inflation. It is now sitting a 4.10% YoY. And core inflation is sitting at 2.10% YoY. Inflation is now the highest since 2009 while core inflation is at the highest since 2001.

Like the Federal Reserve, the ECB still has its foot on the monetary accelerator pedal despite booming inflation.

So, Christine, 19 nations in “Europe” having negative 2-year sovereign yields isn’t low enough for you?

The ECB’s platform in Frankfurt reminds me of a bad TV quiz show where participants try to guess prices next year. Call it “The Price Is Wrong.”

Unless, of course, the ECB sees a massive depression ahead.

The New Abnormal! US Capacity Utilization Falls To 75.2% (Short-date Volatility Spikes)

It used to be that capacity utilization was a signal for The Federal Reserve to raise or lower their key target rate. When capacity utilization rose above 80%, the economy was deemed to getting “hot” and The Fed would raise rates. And vice-versa.

But then mass outsourcing occurred, primarily to China and southeast Asia. Since the 1970s, the general trend in US capacity utilization has been downward. But the last time the US saw capacity utilization of above 80% in Q4 2007. Capacity utilization almost hit 80% in August 2018

Oddly, The Fed started raising their target rate in 2015 under Fed Chair Janet Yellen AS CAPACITY UTILIZATION WAS FALLING. Capacity utilization hit almost 80% as The Fed put the brakes on rate hikes before Covid struck.

So, capacity utilization was obviously not on the mind of Yellen and the FOMC. Call it the new abnormal.

With capacity utilization falling, the path of Fed policy rate has shifted sharply over the past couple of weeks, to currently pricing first hike into the September 2022 FOMC meeting and second hike by February 2023 — there are now 100bp of rate hikes priced by the end of 2023, in line with the Fed’s dot-plot forecast.

Short-dated volatility on front-end U.S. rates — known as the upper left corner of the volatility surface — continues to catch a bid over the U.S. morning session, spurred by a sharp hawkish re-pricing of the Fed’s policy stance.  

The face of abnormal Fed policies.

Transitory? Producer Price Inflation Hits New Record High of 8.6%

So much for transitory inflation.

The US Producer Price index (Final Demand) rose to a blistering rate of 8.6% YoY.

Will this translate to higher consumer prices? Of course it will.

When The Fed or the Biden Administration says that inflation is transitory and will be fixed once we unclog the shipping pipes, remember this warning from the UN that global warming will wipe out entire nations if not reversed by 2000. So, it is too late! I am buying a gas-guzzling Cadillac Escalade with a monster V-8 engine!! (Not really, I am more of a Ford kind of person).

Is Joe Biden Actually Dwight Schrute From “The Office”? Natural Gas Prices EXPLODING And Americans Being Punished!!!!

Since Joe Biden took office in January 2021, we have seen several actions from The White House. First, was the cancellation of the Keystone Pipeline (making the US more energy dependent on others). Second, Biden waived US sanctions on Russian pipeline to Germany. Big winner? Russia. Big loser? US consumers trying to heat their homes.

Here is a chart of natural gas prices since Biden took office in January.

Biden reminds me of Dwight Schrute from the TV show “The Office” as he loves to punish people. In this case, families trying to heat their home. And have his own currency, Schrute Bucks.

Perhaps The Federal Reserve should rename the US Dollar as “Biden Bucks.”

Here is Joe Biden lecturing the American people on Covid compliance.

Venezuela’s Battered Bolivar Gets Makeover With Six Fewer Zeroes (Cup Of Coffee Rises 345%, Household Goods Rising Over 4,000%)

Here they go again! A cautionary tale of a government gone wild resulting in gut-wrenching inflation and 76.7% of the population living in extreme poverty.

Venezuela is launching a new version of the bolivar in the latest attempt to salvage a currency so beaten down by years of hyperinflation that residents have adopted the U.S. dollar.

The so-called digital bolivar, which is being introduced Friday, effectively removes six zeroes from the “sovereign bolivar,” which started circulating just three years ago.

New banknotes and coins will be put into use. Bank accounts will be adjusted to reflect the redenomination. And debit and credit card purchases will become easier: there were so many digits involved in some transactions that merchants were forced to split the transaction into multiple card swipes.

It’s another maneuver aimed at propping-up the national currency, even though President Nicolas Maduro’s government is permitting the use of the U.S. dollar as a way to cope with runaway inflation and shortages. The government has implemented two other currency changes since 2008, dropping eight zeroes. Hyperinflation, among the highest in the world, has slowed to 2,146% per year from more than 300,000% in 2019, according to Bloomberg’s Cafe Con Leche index.

Under Friday’s change, the largest former banknote, for 1 million bolivars — worth about $0.23 –will be replaced by a 1-bolivar coin. One dollar will fetch around 4.2 bolivars instead of 4.2 million bolivars at the official exchange rate.

“This is useless. Prices will continue to rise and, in a few months, the new bills will be useless,” said Leida Leon, a 37-year-old cleaning worker at a Caracas school.

The price of a coffee, an inflation indicator, has risen 345% this year
  

And Venezuela’s official inflation rate for household goods is a blood-curdling 4,245% YoY.

On Thursday, demand for dollars rose as people feared a prolonged suspension of banking services as the redenomination is rolled out, said Luis Arturo Barcenas, senior economist at Caracas-based financial analysis firm Ecoanalitica.

Two-thirds of retail transactions involve the U.S. dollar, according to Ecoanalitica. Yet, many Venezuelans need bolivars for everyday transactions, like bus fares and to buy gas subsidized by the government. While the government is attempting to boost the use of digital payments, many regions are beset by regular electrical blackouts that affect communications.

Venezuelans have faced disastrous government policies and pressure from U.S. sanctions that have put the country on the brink of its eighth-straight year of economic contraction. More than 5 million people have fled the country, once one of Latin America’s wealthiest.

An estimated 76.6% of Venezuelans are living in extreme poverty, up from 67.7% last year, according to a university survey on living conditions known as Encovi.

As least Venezuela’s Treasury Department could produce a likeness of Simón Bolívar (aka, Simón José Antonio de la Santísima Trinidad Bolívar y Ponte Palacios y Blanco) that doesn’t look like a bad cartoon character.

Building Material PVC Rises With Twin Hurricanes (IDA, Jerome [Fed]) Is The US Headed For A Slowdown?

Building materials copper and PVC (pipes) both surged with The Fed’s Cat 5 hurricane approach to liquidity. Then copper backed-off, but PVC rose when Hurricane IDA struck the gulf coast.

The Fed will announcing their plans (maybe) at 2pm today.

What would it take to knock the U.S. recovery off course and send Federal Reserve policy makers back to the drawing board? Not much — and there are plenty of candidates to deliver the blow.

From one direction: U.S. debt-ceiling deadlock, China property slump or simply an extension of Covid caution could hit growth and jobs — taking the Fed’s proposed taper of bond purchases off autopilot, and pushing its first interest-rate increase back to 2024 or later. From the other: Sustained supply-chain snarl-ups could keep inflation stubbornly high and unmoor inflation expectations — forcing an acceleration of the taper, and an early rate liftoff in 2022.

And if shocks arrive from both directions at once, the upshot could be a combination of weak growth and rapidly rising prices — not as severe as the stagflation of the 1970s — but still leaving Fed Chair Jerome Powell and his colleagues with no easy answers.

In the following, we use Bloomberg Economics’ new modeling tool SHOK to explore these scenarios. None of them represents our base case. At a moment of elevated uncertainty, it makes sense to pay more attention to the risks.

Is the U.S. Economy Headed for a Slowdown?
Signs of a slowdown in the U.S. economy aren’t hard to find.

August payrolls — just 235,000 new jobs, one-third of the expected number — were a red flag. The delta variant has made consumers cautious again. The University of Michigan’s index of sentiment plunged in August; only six declines since the modern index was launched in 1978 have been bigger.

Add all these pieces together, and a recovery that looked unstoppable just a few weeks ago now appears to be losing steam. At Bloomberg Economics, we have cut our prediction for annualized third-quarter growth to 5%, from above 7% at the start of the quarter. Others have gone lower, with forecasters at some of the big banks anticipating growth closer to 3%. Even if delta subsides, it’s not hard to imagine scenarios where the slide continues.

One of them involves the partisan impasse over raising the U.S. debt ceiling. The U.S. government is expected to reach the limits of its debt-servicing capacity in October. Default, a potentially catastrophic event for the global financial system, still appears an outside possibility. But even without one, recent history shows that dancing around the possibility — triggering a persistent risk-off period in the markets — can have serious consequences. Separately, a government shutdown starting Oct. 1 would hardly be helpful when the recovery is already struggling to find its footing.

In the three weeks around the 2011 debt-ceiling standoff, the S&P 500 index plummeted more than 15% and corporate borrowing costs spiked. Using SHOK we estimate that a repeat performance would shave about 1.5 percentage points off annualized fourth-quarter growth — and ensure a rocky start to 2022.


Global Risks to the Fed’s Plan

Not all the risks originate so close to home.

Fears of a China housing crash have long haunted global markets. Now, President Xi Jinping’s “common prosperity” agenda has turned that into a real possibility.

Regulators are cracking down on abuses that inflated property values, and tight controls on lending have helped push prices and new construction sharply down. That’s left Evergrande, one of the nation’s biggest developers, on the cusp of a default. The consequences of a wider slump could be severe, because real estate drives demand for everything from steel and concrete to furniture and home electronics — contributing as much as 29% of China’s GDP, all told.

It wouldn’t take a sub-prime style meltdown to send shockwaves around the world and move the dial for the U.S. China’s economy is currently forecast to enter 2022 with growth at around 5%. A property slump could take that down to 3%, triggering a blow to trade partners, a drop in oil and metal prices, and a risk-off moment in global markets. In that scenario, the U.S. would limp into 2022 with the recovery marked down and inflation back below the 2% target.


When Is Jerome Powell Likely to Raise Rates?

Powell has set out the FOMC’s criteria for rates liftoff: maximum employment, and inflation that hits and is set to exceed the 2% target for some time. A blow to employment and demand from a debt-ceiling standoff or China shock might mean those criteria are not met. Rate hikes could be kicked into the long grass, with expectations moving from 2023 out to 2024 or beyond. The test for tapering is less stringent, and a start at the end of this year appears close to baked in. Even so, if the recovery stumbles the Fed might have to make a course correction, introducing discretion into a process that markets expect to run on autopilot.

In 2015, the stock-market and currency slump in China — and the sustained shift to global risk-off sentiment that triggered — was enough to delay the start and slow the pace of the U.S. tightening cycle. In 2021, the Fed might not have that luxury.

China’s residential property slowdown deepened last month, signaling that regulatory tightening and an escalating crisis at the country’s most indebted developer are hurting buyer sentiment. 

Supply-chain breakdowns — from port closures to shortages of semiconductors and lumber — have been one of the main factors pushing U.S. inflation above 5% this summer. That’s enabled Powell to label the price jumps as “transitory” and soothe fears of an upward spiral. The lower CPI reading for August provides some support for that thesis.

It wouldn’t take much, though, for further supply shocks to keep inflation uncomfortably high.
From home electronics to textiles, American consumers load their shopping carts with goods that are made in Asia and delivered via supply chains that crisscross the continent. When the inflation rate for used cars in the U.S. hit 45% this year, driven by semiconductor shortages that threw assembly lines into disarray, it illustrated what can happen when those fragile linkages break down.

All of this adds to the risk of further “transitory” shocks to inflation. One early-warning signal: according to press reports, semiconductor giant TSMC has announced plans for price hikes of as much as 20% next year.

The effects of pandemic-induced supply-chain disruptions are still rippling through businesses and households, reflected in higher prices for goods, delays in receiving them and flat-out shortages.

For the Fed, inflation running hot into 2022 would be troubling on its own, and worse if it triggers a shift in inflationary psychology. If businesses start to feel comfortable setting prices higher, and workers start demanding higher wages to compensate, the risk is a situation reminiscent of the wage-price spirals of the 1970s — when it took a recession engineered by the Volcker Fed to squeeze inflation expectations out of the system. 

Unmoored inflation expectations would very likely trigger an early and aggressive response from the Fed: an accelerated taper, and a rate hike in 2022.


A no-win scenario would be if the two blows — to output and jobs, and to supply chains and prices — landed at the same time, leaving Fed officials in a quandary. Ease policy to support growth and they would add fuel to the inflationary fire. Tighten to bring prices under control, and they would exacerbate the drag on the recovery, throwing more Americans out of work.

Agreement in Congress, or decision by the Democrats to go it alone, could remove the default risk. China has in the past proved skillful at shifting gears to avoid a housing crash. Vaccination rates in Asia are rising. The latest U.S. data — inflation slowed and retail sales rose — have been encouraging.

Hurricane Jerome doesn’t have a whole lotta lovin’ for the average American worker.