Above 5%

Both the equity futures and the bond market are starting the week reacting to the downgrade on Friday. Index futures are down but not chaotically, since it was partially discounted. The bond market has been anticipating the deterioration of the U.S. finances for a while and now both the 20 and 30 year are trading above 5% on yields, which is a psychological mark, but an important one nonetheles. The problem at hand is simple, and it’s shown in the chart below: for 70 years, tax revenue has been relatively constant at around 16% of GDP. But government spending has increased from 17% in the 50’s to 23.4% today. Only during the Clinton years the U.S. economy had a surplus in its finances, due to Y2K investments that gave birth to the internet as we know it. The Trump administration needs to take advantage of its majority in Congress to cut spending, otherwise downgrades will keep coming. And the best progress (or lack of) indicators are the bond market, gold and Bitcoin. Bonds will continue to print higher yields if spending is not reduced and gold and bitcoin will continue to rise accordingly.

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