Global Macro Report February 2018

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Having argued for a secular breakout in yields for months, I suddenly find myself in much more crowded, and prestigious company. With so many (freshly-minted) bond bears, my rants for higher yields may seem redundant. Curious readers can find them in these reports: a Demographic Case for Higher Rates (Oct 17), Seven Signs that the 36-Year Old Bond Bull is Over (Nov 17) and Brace for a 100-point yield shock and $1.3 Euro (Dec 17) Instead, I will focus on the two obvious follow-up questions: how high can rates go, and how long will it last? To answer these, we must understand why yields fell so much in the past two decades. We must unlearn all the crackpot theories that economists have conjured and remember that the interest rate is the price that clears the market for savings. An excessive supply of savings over desired investments will depress the price of money. If many large and fast-growing countries try to run current account surpluses at the same time, their excess savings will clog capital markets. Three mountains of excess savings (the petrodollar glut, the German glut, and the Chinese glut) caused the fall in global yields of the past 20 years. My journey will start in 1999, when three seemingly unrelated events created the greatest economic imbalance of our time: oil prices rebounded from a secular low of $9.6 a barrel, the Euro replaced the Deutsche Mark, and China and the U.S. signed the bilateral WTO agreement. 17 years later, these three events had engendered a savings glut of $8 trillion and $14 trillion in negative-yielding debt. I believe that 2018 will be the mirror opposite of 1999. A triple squeeze will drain global excess savings: the U.S. will become the world’s largest oil producer, Germany will abandon its policy of budget surpluses, and India’s economic growth will outstrip China’s. The three gluts arose together, and together they will vanish.

Who will supply the world’s capital after the retirement of these massive hoarders? It will take much higher yields to convince Americans and other impecunious borrowers to quit their decade-long addiction to foreign savings. Hence, my answer to the original question is that yields will rise much higher, and that the bond bear market will last much longer. In Dante’s Inferno, usurers are kept at the bottom of the lowest circle of hell. That is a perfect metaphor for the torments that await bond investors.

Boticelli’s bond market outlook, 1485

Higher for Longer … Much Higher for Much Longer The Great Savings Squeeze of 2018

“Here's to the future, hear the cry of youth, I want it all, I want it all, I want it all, and I want it now, I want it all, I want it all, I want it all, and I want it now” Queen, I Want It All, 1989

Global Macro Report February 2018

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The Three Singularities of 1999

Historical event has a curious tendency to cluster around pivotal years. A handful of years contain centuries worth of historical events: 1492, 1789, 1848, 1914, and 1979. I believe that 1999 will be remembered as one of these years that bended the arc of human history: for example, that year marked the apogee of Zinedine Zidane’s career and the sublimation of football into an art form. Outside of football arenas, three seemingly isolated events conspired to open a new era in economic history.

• On November 15, B. Clinton and J. Zemin signed the free trade agreement that pave the way for China’s WTO accession two years later.

• On January 1st, the euro was launched: after a three-year transition period, the Deutsche Mark ceased to be legal tender on December 31st, 2001.

• Brent oil prices rebounded from a secular low of $9.6 a barrel and an unknown KGB agent became Prime Minister of Russia on August 9. Oil prices would soar to $146 a barrel nine years later, and V. Putin would still be President of a much-transformed Russia 19 years later.

These three events created the massive global savings glut that would define the performance of capital markets in the next two decades.

China’s integration to the world economy would not just increase the global workforce by 770 million: its massive savings hoards, at an astounding 40% of national income, would slowly leak into global capital markets. With the introduction of the euro, the world’s largest exporter would experience the adrenaline rush of an undervalued currency, after decades of Deutsche Mark strength. The secular low of oil prices meant the dawn of the great commodity bull market of the early 2000s which would flood dictators and sheiks bank accounts with a biblical tide of cash. To this we shall now turn.

(Yes, this illustration is hardly related to my topic, but I really like Zidane)

Global Macro Report February 2018

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The Petrodollars Glut

Since I have described the Chinese and German savings gluts at length in “a Demographic Case for Higher Rates” and “Four German Singularities”, I will start with the third, and least important, driver of the global savings glut: the great commodity boom of the 2000s.

The origins of the petrodollar glut As Brent prices fell to a cycle low of $9.6 a barrel in December 1998, most of the world’s exploration and production had become uneconomical. Investments in relatively high cost basins, such as the North Sea, Alaska, and the Gulf of Mexico were abandoned. Production only made sense in the basins with the lowest extraction costs: Ghawar in Saudi Arabia, Burgan in Kuwait, and Western Siberia in Russia. Production in “safe” western countries, such as the U.S., Norway, and the United Kingdom dwindled. OPEC recaptured some market share, but the biggest winner was Russia. After ten years of chaos during the post-soviet transition, the country’s production had fallen to 5.8 million a day in early 1998. Under the firm, and often brutal, grip of V. Putin, the Russian oil industry would double its output by 2016, and (briefly) become the world’s largest producer.

How Russia Became the World’s Largest Oil Producer

Russia doubled its oil output in 20 years!

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OPEC and Russia were not only selling more oil, but they were also getting more dollar per barrel – a lot more. Based on the country’s oil output and the price of Brent, Russia’s oil revenues soared from $23 billion in 1998 to a peak $435 billion in 2013. Recycling such a windfall in the domestic economy would have been a nightmare for most well-run countries (the Netherlands contracted the “Dutch disease” with far less oil revenues in the 70s) but Saudi Arabia and Russia were helped by their kleptocratic political systems. Only a few drops of this oil mana trickled down to their domestic populations. Russia and Saudi Arabia have accumulated trade surpluses of $2.1 trillion since 1999, but very little was recycled in their domestic economies. Petrodollars ended in Swiss bank accounts, prestige purchases, and currency reserves. Chief amongst them were U.S. treasuries: according to the Treasury International Capital data, these two countries acquired $255 billion worth of U.S. treasuries in the past two decades, a useful insurance policy against a potentially hostile superpower. Petrodollars were like a giant cloud overhanging global capital markets in the early 2000s, bidding asset prices up, and relentlessly eroding bond yields. “Lower for longer” bond yields echoed record prices at Christie’s auctions and gravity-defying real estate sales in Monaco, London, and Hong Kong.

How the petrodollar glut is being drained Amidst of the many successes claimed by D. Trump in his first State of the Union Address was the fact that the U.S. oil production rose above 10 million barrels a day for the first time since 1970. If current trends continue, the U.S. could reclaim its seat as the world’s largest oil producer this year, and reach energy self-sufficiency by the end of the decade. Horizontal drilling and fracking allowed the U.S. to successfully tap in its vast resources of shale oil and natural gas. The geopolitical and economic consequences of the shale revolution are enormous: long-term alliances will be unwound, new military strategies will be defined, and the cards of the “great game” in the Middle East will be permanently reshuffled. It is beyond the scope of this report to analyze all these changes, especially since many consequences of the shale revolution are not visible yet.

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The Petrodollar GlutOil revenues, surpluses and currency reserves of Russia and Saudi Arabia

Holdings of U.S. Treasuries Estimated oil revenues Cumulative current account balance

Source: OECD, IMF

Russia and KSA accumulated surpluses worth $2.1 trillion since 1999

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However, I believe that it is safe to say that the shale revolution ultimately transfers oil and gas income from OPEC and Russia to the U.S. (and, to a lesser extent, Canada). This is all that matters for my case because a dollar of oil revenue in the U.S. is not equivalent to a dollar of oil revenue in Saudi Arabia. A dollar of oil revenue in Saudi Arabia is a dollar of profit because the marginal cost of a barrel is close to zero in the oldest and most productive fields. Hence, a Saudi petrodollar has no immediate real-world counterparty: it does not drain any economic resources. Instead, Saudi petrodollars provide monetary relief as they find their way into the U.S. treasury market or excess bank reserves in Dubai, Singapore, or Geneva. On the contrary, a dollar of U.S. shale oil has many real-world counterparties: the cost of drilling new wells, the wages of the truck drivers that clog the highways of West Texas, and eventually the bill of upgrading the pipeline infrastructure. Because of American’s remarkable propensity to consume, this dollar quickly circulates throughout the U.S. economy according to the money multiplier. I am unable to precisely estimate how much resources have been mobilized by the shale boom1, but what matters is that the shift of oil production from OPEC to the U.S. will put pressure on yields and inflation. The rise of OPEC and Russian production between 1999 and 2014 was ultimately a tax on U.S. consumers to the benefit

of sheiks and oligarchs. It transferred income from households who consume more than 100% of their income to plutocrats who save every marginal dollar. Unwinding this tax will melt the world’s savings glut, increase final demand, and jolt the velocity of money from its current slumber.

U.S. Trade Balance of Petroleum Products and Natural Gas Exports: 2008 - 2017

1 It is impossible to estimate the true production cost of barrel of shale oil: it is obviously less than the Saudi thought it was when they tried to undercut U.S. shale production in 2014. But it is surely more than the 2016 oil prices lows, which sent thousands of U.S. E&P companies into bankruptcy.

Global Macro Report February 2018

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These pressures on capital markets will be exacerbated by domestic changes in Saudi Arabia and Russia. The Saudi economy must be completely revamped to provide millions of jobs for a soaring and mostly unproductive population. The kingdom’s new strong man, Mohammad Bin Salman, has unveiled grandiose projects, such as building Neom, a futuristic city in the country’s empty Northwestern corner. He is also trying to project Saudi influence, arms, and money all over the Middle East to counter the growing threat of Iran. Other than their likely failure, these projects have one thing in common: they will cost a LOT of money. The kingdom’s budget deficit soared to 8.9% of GDP last year. Instead of adding to the world’s savings, Saudi Arabia will soon import capital: to wit, it is considering selling not just the eggs, but also the golden goose, with the likely IPO of a stake in Saudi Aramco in the fall. Russia’s ability to feed the global savings glut is also disappearing – for the exact opposing reasons. While KSA’s budget is strained by its youth bulge, Putin is emptying the state’s coffers to stop the country’s demographic decline. In 2007, the government introduced a program to pay mothers $11,000 to have more than one child. The lucky women who procreate on the Day of Conception can even hope to be receive free refrigerators and washing machines. To Putin’s credit, these policies have been successful. Russia’s total fertility rate has increased to 1.7, above the levels commonly observed in Western Europe, and Russians have gained five years of life expectancy under the rule of Vladimir Putin. But as I explained in a Demographic Case for Higher Rates, more babies and retirees mean higher dependency ratios and lower net savings. It is hard to export capital when a dwindling number of workers needs to support two idle generations. The country’s military successes will further drain Russia’s capital reserves and commodity revenues. As a (rare) positive consequence of the collapse of the USSR, Russia no longer had to support satellite states around the world. But Putin’s military successes in Crimea, Ukraine, and Syria will eventually turn into costly client states. To quote Trump, Putin may “continue to rebuild the Russian empire”, but Russian savers may get “tired of winning”, eventually.

The City of the Future, on Sale for $640 billion

Artist rendering of Neom, MBS’s planned “civilizational lead for humanity”

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The German Savings Glut

I have described the German glut at length in “Four German Singularities” so I will briefly summarize the argument. Since the launch of the euro, Germany has accumulated trade surpluses worth $2.9 trillion, matching China’s, and dwarfing that of oil exporters. Now that the Chinese surplus has normalized, the German surplus is simply the world’s largest economic imbalance in the world. Germany’s monstrous surplus is the product of four factors. First and foremost, demography. The German pyramid has three singularities:

• A very narrow top, due to the country’s heavy losses during WW2

• A very large bulge of baby-boomers, born during the economic miracle of the 1960s

• A shrinking base, due to an extraordinary compression of natality in the past 20 years

Because of these three singularities, Germany has an abnormally high number of peak earners who support an abnormally low number of dependents. As a result, the country’s ability to save is enormous – which explains why Germany systematically violates the European Commission’s rule on excessive surpluses, and why its government could achieve

Schwarze null (a balanced budget) almost effortlessly.

Second, culture and history. Traditional Teutonic values likely emphasize thrift, as evidence by the etymology

of the word schuld (which means both debt and sin) and the legendary stinginess of Swabian housewives. The country’s tragic history in the past century likely reinforced these cultural traits. The Germans who were born in the baby boom of the 60s were raised with the horror stories of the hyperinflation of the 30s, the crimes of Nazism, and the eventual destruction of the country. The long shadow of the failed Weimar Republic and the dark ghost of the Third Reich led German boomers to behave very differently from their U.S. counterparts. After the war, American boomers went on with their lives, bought houses in the suburbs, took credit cards, and made a little more than two children per household. German boomers worked, saved a lot, rented small houses, and made barely more than one child per household. This abnormal German thriftiness is illustrated by the country’s low home ownership rate, its conspicuous absence of housing bubbles (until recently), its preference for cash, its low credit-card penetration, and its low stock capitalization-to-GDP ratio.

Global Macro Report February 2018

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Fourth, deliberate mercantilist policies. Just as Swabian housewives save a lot when times are good, and save even more when times are bad, successive German governments hoarded surpluses. In the 70s and the 80s, France, Italy, and Spain could balance their trade with Germany via competitive devaluations: the European Monetary System, and then the Euro permanently solved the issue. In the 90s, the fiscal shock of the

reunification temporarily sent the German budget and trade balance in the red. G. Schroder’s Agenda 2010 and

the Hartz 4 labor market took care of that problem: German workers would tighten their belts while Spanish, Greek, and Italian households would buy German-made goods on credit. The Frankfurt-based European Central Bank underwrote this great experiment in vendor financing as it viewed it as sign of economic convergence. Last but not least, the rise of German surpluses coincided with the launch of the euro. Since the euro included weak currencies, such as the lira, the peseta, and the Drachma, its external value was less than what the Deutsche Mark would have fetched it had floated freely. Being a new currency with a new central bank and a dysfunctional architecture, the euro also suffered from an additional existential discount, reflecting the market’s skepticism towards the European Union’s great experiment. It is almost a tautology that arming the world’s largest exporter with a systematically undervalued currency would result in massive trade surpluses.

How the German glut is being drained I expect the German glut to be the most resilient of the three big gluts. The Chinese and petrodollars surpluses have already been drained in the past three years, but the German surplus held at a steady $300 billion last year. But drain it will, because time plays against German savings. About 14 million Germans will reach the retirement age in the next decade, almost double the 7.2 million Germans that will enter the labor force (ex. migrations). The German pension system was not built to survive such a massive shock. Politics are a second headwind against German savings. Four months after the 2017 election, Germany still does not have a government – a revolution in itself in a country that used to predictably re-elect the incumbent

coalition. But the government guidelines that will eventually come out of the GroKo negotiations will be radically different from the fiscal prudence of the Schäuble-Merkel years.

W. Schäuble was the last German finance minister to have experienced the war. He came of age when the Freiburg School economists were theorizing

austerian ordo-liberalism. For better or worse, his successor will be much more sensitive to French and American neo-Keynesian ideas . Last, Germany now holds the world’s second largest population of foreign-born residents, at 12 million or close to 15% of the population. Traditional Germanic attitudes towards saving, debt, and houses will slowly disappear in the great melting pots of Frankfurt, Munich, and Berlin.

Auf Wiedersehen, balanced budgets and zero interest rates!

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The Chinese Glut

As a global exporter with a troubled past, China shares a lot of similarities with Germany. First, demography. China’s age pyramid also bears the scars of its tumultuous past. The top is very narrow, due to the heavy human toll of poverty, civil wars, foreign occupation, and failed economic policies. Natality was very dynamic in the Cultural Revolution, when Mao emphasized population growth as China’s answer to the paper tigers of the two imperialist powers. China’s age cohorts almost halved as the one-child policy was implemented in the 80s. The economic impact is the same as in Germany: a lot of prime-age Chinese workers do not need to support their parents and they have only one child to raise.

China’s absurdly high savings rate is also a product of its traumatic past. China’s greatest generation grew up during the Cultural Revolution, which featured widespread cannibalism among other social atrocities. Side-effects may include an abnormal compulsion to save. As in Germany, this hoarding disorder became national policy. In the 80s, Deng Xiaoping had to rebuild the Chinese economy from the ground. Being cut off from global capital markets, he had to mobilize vast domestic savings to modernize the economy. “To get rich was glorious”, and to save was a patriotic duty.

During the East Asian crisis, Jiang Zemin saw what happened to countries whose economic development relied upon the kindness of foreigners. The gnomes of the International Monetary Fund, who had just shamed Indonesia’s Suharto into public submission, would never tell the CCP how to run their country. If China had to build a multi-trillion-dollar cash hoard to keep Western technocrats at bay, so be it! National pride has no price. Becoming the principal creditor of the U.S. Treasury also offered formidable leverage against an increasingly mercurial superpower.

The public shaming of Suharto, 1998

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How the Chinese glut is being drained As in Germany, time will eventually turn China’s cohorts of savers into borrowers. But because China’s baby boom occurred later, this will not be a problem until a few more years. The country’s geopolitical ambitions will drain the country’s savings before that anyway. The “belt and road initiative” will turn Chinese surpluses into deficits, just like the Marshall plan eventually ended the era of large U.S. surpluses. I have no specific insight on China’s belt and road initiative so I will just summarize an excellent book from my esteemed friends at Gavekal, “China’s Asian Dream”:

• It is massive: the “belt and road” initiative is like FDR’s great works and the Marshall plan combined, but much bigger. Instead of stashing its savings in U.S. treasuries, China is building highways, railroads, and ports in three continents. By definition, this is bearish for treasuries, and bullish for inflation.

• In typical Chinese manner, it is implemented flexibly, but steadily. Banks, state-owned enterprises, local governments, the People’s Liberation Army, and private agents pursue a variety of initiatives. The government defines the long-term strategy (to direct trade between Europe, Asia, and Africa along China-controlled routes) but is quite pragmatic with its implementation.

• China wants its belt and road partners to settle their trade in Chinese Yuan so that the RMB eventually becomes the world’s reserve currency.

I think this last point is the most important. China’s overarching economic priority has been to make the Yuan an alternative, and ultimately a replacement, to the U.S. Dollar. China wants the “exorbitant privilege” to have foreigners use its debt to settle their trade. Having a (the?) world’s reserve currency is asking foreigners to finance Chinese deficits. The entire point of the exercise is to create a source of demand for the domestic currency that is not dependent on exports. If the “belt and road” initiative is successful, China will become a structural deficit country. This process is already well under way: in the past ten years, the Chinese trade surplus has shrunk from 10% of GDP to 1%. The country’s foreign exchange reserves have melted by $1 trillion, and China’s holdings of U.S. treasuries have flatlined since 2011.

China’s Trade Surplus and Currency Reserves

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The Great Savings Squeeze of 2018

The triple savings glut of the 2000s-2010s was the largest economic imbalance in modern economic history. Just four countries (China, Germany, Russia, and Saudi Arabia) accumulated trade surpluses of $8 trillion. The following three statistics give an idea of the enormity of this savings glut:

• China, Germany, Russia, and Saudi Arabia’s combined GDP was just $3.5 trillion in 1999. • These four countries had posted a combined deficit of $88.9 billion in the 90s: this savings glut literally

came out of nowhere. • At their peak, the three gluts accounted for almost 60% of the all the deficits of the world combined.

Let me restate this last point: 60 cents of every dollar that was borrowed in the U.S., India, Australia, the U.K, Africa, Latin America and all the deficit nations came for the four savings glut countries.

From this analysis, it is obvious that the shrinkage of the triple savings glut will lead to higher yields, much higher yields. So far, I have argued that this great squeeze is on its way, but I have not given a precise date. This section will take a risk and make a verifiable forecast: 2018 will be the tipping point that will start the global savings squeeze. Just as three events symbolized the dawn of the glut era in 1999, 2018 will feature three dramatic reversals that will epitomize the global savings squeeze: the U.S. will become the world’s largest oil producer, Germany will abandon its policy of budget surpluses, and India’s economic growth will outstrip China’s.

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The Triple Savings Glut of the 2000s-2010s

Chinese Surplus German Surplus Saudi + Russia All Deficit Countries Borrowing Needs

Source: OECD, IMF

China, Germany, Russia and KSA accumulated $8 trillion in excess savings since 1999!

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The U.S. will become the world’s largest oil producer A combination of tax incentive, buoyant oil prices, and deregulation will cause the U.S. to become the world’s largest oil producer for the first time since the late 80s. As I explained in the first part, transferring wealth from OPEC and Russia to the United States naturally results in higher aggregate demand, lower savings, and a higher velocity of money.

U.S Oil Production and Rig Count

Germany will abandon its budget surplus policy If implemented, the tentative coalition agreement between the SPD and the CDU will bust the budget surplus:

• No tax will go up

• The solidarity tax, which was implemented to finance the reconstruction of East Germany, will be gradually suppressed.

• 1.5 million new apartments will be built in Germany by 2020, up from the current rate of 280,000 a year.

• Investments for the energy transition and digital connectivity will be ramped up. I am concerned that the coalition agreement will be struck down in the February vote by the SPD base, but it does not matter for deficits. The formation of CDU minority government, or even new elections, would not change my forecast. If demography is destiny, then deficits are Germany’s fate because about 1.4 million Germans will retire every year for the next ten years.

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India’s growth will outpace that of China According to the World Bank, the paths of China and India crossed last year, as growth rates should settle at 6.7% in both countries. In 2018, India’s growth will outpace China’s – permanently. I cannot stress enough the historical importance of this tipping point: China’s secular decline ended when Deng Xiaoping implemented the four modernizations program in 1979. For almost forty years, China gained economic clout over the Asian continent grew, while India stagnated at best. If economists2 are right, the next forty years will deliver the exact opposite outcome. Why does this matter for rates? Because China was (and still is) a net saver, while India is, and will likely remain, a net borrower. The economic rise and its integration to the global economy of China flooded capital markets with mountains of savings and hoards of currency reserves. The rise of India will do just the opposite: instead of supplying the world with savings, India will need to import them. This great transformation is ultimately a symptom of the great inversion I described in a Demographic Case for Higher Rates. During the 2000s, surplus countries (China, South Korea, and Southeast Asia) grew much faster than deficit countries (the U.S., India, and Latin America). Assuming every country kept the same consumption and savings preference, surpluses would have grown faster than deficits. Yet, accounting identities always balance

ex post: savings must equal investment, the foreign balance must equal the net savings balance3, and trade surpluses must be offset by deficits somewhere else. Interest rates balance the global market for savings: for 20 years, the problem of excess global savings was solved by falling rates. But global growth is about to shift durably towards deficit countries. The economic engines of the next decades will be India, Latin America, and Africa. All these countries have three things in common: they are relatively poor, young, and are net borrowers. Unlike China, which financed other countries’ deficits, they will need the world’s savings to finance their growth.

2 More appropriately demographists, since long-term growth projections are mostly based on demography. 3 The fundamental GDP equations simplifies: X-M = S-I

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Real GDP Growth Rates of China and GDPBased on OECD and World Bank's Long-Term Forecasts

China India

Source: OECD, IMF

India's growth will permanently overtake China's in 2018

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Who will save to finance the electrification of Africa, the construction of decent roads in India, and the education of Brazilian children? If my case is correct, the three main sources of excess savings – oil-producing countries, Germany, and China – will all dry up at the same time. Looking at the list of countries with current account surpluses, the most likely replacement would be Japan, South Korea, Switzerland, Singapore, and the Netherlands. Size is the first issue: these five countries together account for just 40% of China’s GDP on a purchasing power parity basis. Demographics are a second issue. Japan’s household savings rate has fallen to zero from 15% in the 90s as massive cohorts of workers retired. The country has more than 10 million octogenarians, who are permanently out of the labor force and need the savings of a shrinking workforce to support their spending habits. South Korea, Switzerland, Singapore, and the Netherlands are only a few years behind Japan in the ageing process: I expect their savings rate to fall precipitously well.

Japan’s Household savings Rate versus Retired Population

If all the countries with a tradition of high net savings are tapped out, new savings will need to come from countries with a tradition of deficits. The U.S. and, to a lesser extent, Canada, and Australia, would be natural reservoirs of savings. These are large, prosperous, and well-endowed countries with relatively dynamic demography. Due to their long tradition of integration, immigration can solve the problem of ageing much more smoothly than in Europe. Their bountiful natural resources provide them with the same rent that OPEC countries enjoy.

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Hence, the pending savings squeeze could be avoided if Anglo-Saxon countries changed their spending habits. But after living 10 years in the U.S., I have become convinced that credit cards, tax cuts, and trade deficits are inalienable American rights, on a par with the right to pursue happiness and bear firearms. Consumption (loads of it, on credit if need be), home ownership (at whatever cost), and the optimistic view that prosperity awaits (so we can borrow today) are integral parts of the American dream. And let’s not forget the American nightmare: outrageous education costs and a dystopian health care system, which force most middle-class Americans to live paycheck to paycheck. Americans have the patience of an overtired toddler. Like a drunk gambler at the roulette table, Americans systematically spend whatever good fortune is sent their way. I feel comfortable making these broad generalizations because the past five years have validated my prejudices. The U.S. enjoyed a once-in-a-lifetime windfall in the form of shale oil and gas. The energy deficit, which used to account for the bulk of the country’s trade gap, disappeared overnight. The country’s twin deficits did shrink a little between 2011 and 2015. The household savings rate even increased modestly to 6% in 2015. But as the French say “chassez le naturel, il revient au galop”, or as the Americans say, “the tiger cannot change its stripes”. Two years later, the trade deficit is growing again. The savings rate has collapsed to 2.6%. The budget deficit is soaring, despite the best economic conditions in a generation, and before the “biggest tax cut this country has ever seen”. The post-Trump spike in yields, which should have tamed investments and boosted savings, has convinced American households, businesses, and governments to spend more, and to spend now. If the world’s future macroeconomic equilibrium rests upon the saving ability of Americans, investors must brace for higher yields for longer. Much higher yields for much longer.

It’s a Party in the U.S.A.! U.S. Household Savings Rate, Current Account Balance, and Budget Balance

# MAGA Agenda is Recreating the Twin Deficits

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