The Elephant In the Room

Kevin Warsh just completed his highly-anticipated Jackson Hole speech, and, to no surprise, there was no mention of the elephant in the room -- which would be the treasury's financing burden going forward... 

I.e., given the enormity of the debt coming due over the next couple of years, as well as the massive current budget deficit, there's no understating the need to issue new treasury debt at rates that simply can't be allowed to rise measurably on the front-end -- despite Warsh's tough-sounding (on inflation) speech this morning.

The great irony here is that, forgive me, inflation is precisely the answer to remedying the debt problem, as it's measured -- a % of GDP.

I.e., there's no paying down the debt, that's a fantasy they're no longer willing to even insult our intelligence with... Ah, but if "we" grow the economy faster than "we" grow the debt -- a la mid-40s to early-50s, we can wake up somewhere in the future with something less than 100+% debt-to-gdp.

You see GDP is expressed in nominal fashion, i.e., not adjusted for inflation... So, imagine, you, me and the rest of America purchases precisely the same unit volume of goods and services this year as we did last, and yet the average price of those goods and services rises by, say, 5%... Well, then, GDP rises by 5%... If the national debt rises by anything less than 5% we've taken a step in the right direction.

Now consider the interest "we're" paying on the existing mountain of debt -- interest so high that it requires "us" borrowing (remember, "we're" having to borrow to pay "our" bills) simply to pay it... Hence, the utterly critical need to keep borrowing rates low... And therein sits the elephant in the room!

Warsh was essentially Bessent's pick.. Why? Because he obviously understands the Treasury's monumental challenge right here... Longer-term treasury rates are determined by the market, based on demand, and based on the market's growth and inflation expectations going forward... Shorter-term yields are determined by the Fed... And there, shorter-term, is where we'll see the bulk of new treasury debt issuance...

I.e., Warsh, despite the tone of his Jackson Hole speech, has to somehow convince at least 7 of the 12 FOMC voting members to not hike the fed funds rate...

Now, don't get me wrong, a fed hike can happen... Like I just said, it could happen with the Chairman himself issuing a dissenting vote... But if and when it does, it'll be couched in the most dovish of terms, with a promise (and an intent if you're Warsh) to back it off, and some, at the very first sign of economic stress.

It's 20 minutes or so post-speech as I type... And while the major US equity market averages (save for the SP500 Equal Weight, it's down a titch) are slightly in the green, the underlying action reads pretty mixed... The SP500 is literally split in half, meaning half of its members are up, half down this morning... The Nasdaq Comp has slightly more losers than winners at the moment.

Stay tuned...

Up next your weekend macro wrap.