Still Waiting For Run To Safety To Materialize

The Treasury Department reported Wednesday $573 billion in red ink over the last three months alone. That’s over 60% higher than the same period a year ago.

Deficit hawks are virtually nowhere to be found in Washington, D.C. And the Federal Reserve Board is full of doves who intend to keep pumping out easy money into the financial system.

Monetary policy is one thing that investors can count on not changing in the new administration.

When he leaves office next week, Donald Trump will go down in history as one of America’s most controversial Presidents. He continues to have passionate supporters as well as passionate haters.

Trump can certainly claim some major accomplishments on taxes, deregulation, and border security as part of his legacy. But he won’t earn high marks on his handling of the national debt. It has surged by a staggering $7.8 trillion over the past four years.

As a candidate, Trump had vowed to reduce the nation’s debt burden. But as President, he rarely used his veto pen to try to hold Congress’ spending ambitions in check.

Even before the COVID outbreak, big spenders in both parties were fueling more federal borrowing than ever before.

Now it’s not even a question of whether the next President will pay down the debt or balance the budget. It’s a question of what will be required of the Fed to enable four more years of annual deficits measured in the trillions of dollars.

The risk is that more explicit central bank monetization of federal borrowing causes the bond market and the U.S. dollar itself to lose credibility in the eyes of global investors.

As a consequence, price inflation could run much hotter than most investors currently expect. It’s possible that stocks could continue to push higher in such an environment, but it’s also likely that we would see some major sector rotation.

Mining companies have big upside potential in an inflationary environment. But they also have big downside risks, especially if the political environment turns hostile.

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