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The following quotes are attributable to the noted authors:
The Unintended Consequences of Ultra-Low Interest Rates
Niall Ferguson, Milbank Family Senior Fellow at the Hoover Institution at Stanford University
Those whose job it is to manage risk today tend to focus on the things to which probabilities can be attached and shrug their shoulders about everything else. They might do better if they simply assumed that most grand designs will go awry.
Take the sudden surge in nominal and real interest rates we are witnessing, which has seen the yield on a 10-year US Treasury rise from 0.66% in April 2020 to 4.88% this week. The last time the 10-year yield moved this much in the space of three years was 1979-82 — back when Fed Chairman Paul Volcker was slaying the 1970s inflation dragon — a period that saw not one but two recessions.
I am not the only one getting that nasty 1980s feeling. Last week my Bloomberg Opinion colleague John Authers was curdling investors’ blood by recollecting the way a comparable rise in bond yields was followed by the Black Monday stock market crash in October 1987 — “still the single most terrifying day in market history” (which is a little hard on the black days of October 1929).
Yet it is worth looking further back in history. In terms of total returns, this is the biggest bond market rout in 150 years. Last year was in fact US bond investors’ worst year since 1871, with a total return of minus 15.7%, even worse than the annus horribilis of 2009. For 2023, the year-to-date return has been almost minus 10%; annualized, that’s minus 17.3% — even worse than 2022. We are looking at bond investors’ two worst years in a century and a half.
US Deficits Out of Control
Vitaliy N. Katsenelson, CFA, CEO of IMA
Our GDP (revenue of the economy) is approximately $26 trillion, and our tax collection (revenue of the federal government) is around $4.8 trillion (18.5% of GDP).
Our government is expected to spend approximately $6.5 trillion in 2023, resulting in a $1.7 trillion budget deficit, or 6.5% of GDP.
The average maturity of debt owed by the Federal government is around six years. Therefore, we have yet to feel the full impact of interest rates going from nearly 0% to 5%. If interest rates remain where they are today, our annual interest expense will go from a few hundred billion to $1.6 trillion in six years, thus adding roughly another trillion or so to the current $1.7 trillion deficit, pushing our budget deficit into double digits as a percentage of GDP.
Why the US is Growing its Military Presence Off Israel’s Coast
James Stavridis, retired US Navy admiral, former supreme allied commander of NATO, and dean emeritus of the Fletcher School of Law and Diplomacy at Tufts University
With a couple of thousand Marines nearby at sea, the President’s options will include securing airports for military and chartered commercial evacuation of Americans; guarding concentration points to collect citizens preparing to evacuate; securing coastal bases if air evacuation becomes too dangerous; and providing emergency medical support.
Above all, the special operations elements of the 26th MEU could be part of finding, fixing, and rescuing American hostages. This would obviously be done in complete coordination with Israeli special forces, and with a recognition that such operations are inherently dangerous and very often end with tragic outcomes for innocent hostages. It would most likely include US tier-one special forces, the elite SEALs and Green Berets operating globally out of Fort Liberty, North Carolina.
This all sounds like the culmination of a Tom Clancy novel, and all of this will be controversial in terms of potentially having actual US boots on the ground and fighter jets and helicopters in the skies above the fight in Gaza. But the highest obligation of a President is to protect American lives, and if events spiral into an even higher level of violence in Israel, the presence of US Marines gives the administration more and better options to respond. Send in the Marines.
Why have global markets reacted modestly to the outbreak of war in the Middle East?
David Bailin Chief Investment Officer, Citi Global Wealth
Little risk of a wider regional conflict has been discounted in financial markets at this moment. What moves markets are events that catalyze a turning point in regional economies or the global economy. 90% of history’s shocking geopolitical events since World War II did not cause a collapse in the world economy. The economic impact of most conflicts is regional. According to top military and political advisors, neither Israel nor Iran will be in any rush to engage in a direct military conflict. The experts noted that Israel’s capacity to engage in a multi-front war was limited and that Iran had political and practical reasons not to provoke an even wider conflict. The defense support that the US has provided to Israel has been accompanied by extensive political activity designed to limit the geographic scope of the armed conflict. For now, this matches the conclusions drawn by global investors.