On Tuesday the US Congress passed a bill to address the budget deficit. The plan calls for $900B in deficit cuts, and $1.5T in additional cuts to be found by a bi-partisan committee by the end of the year.
This is a sham!
• As miniscule as this is, most of the cutting is going to happen in the later years.
• $25B in cuts happen in the first year (out of a $3.8T Federal Budget!!!!).
• The Congressional Budget Office (CBO) calculates this plan will leave us with a $22T debt in 2021. Deplorable. It is also too rosy an estimate.
• The CBO is still counting on 4% GDP growth this year. Think that’s going to happen? It will be somewhere between 0 to 1%. Doubtless the CBO entire review of the plan is too rosy.
• My estimate is the plan would leave the US with $24T in 2021, and a $16T economy. That’s a 150% debt:GDP ratio. This is what Greece looks like. Countries don’t come back from debt levels like that. They default and offer 50% losses to bond holders.
It is therefore only a matter of time until one of the big three ratings agencies has the temerity to label this for what it is: a sham. S&P says $4T in cuts would merely be a down payment in what needs to happen over the next 10 years. Folks, I’ve shown you the math already. You know this to be true.
The bond market won’t let this current “plan” slide. James Carville was right: fear the bond market. However, with our investment philosophy, the bond market vigilantes should be thanked and embraced, not feared. We’ll leave that to the buy & hold long-only equity bunch.