Runway Deficits From "Fiscal QE" Leading To A Bond Market Crisis? | Simon White, Bloomberg

**SPEAKER_1** (0:00)
This episode is brought to you by Greenlight. Get this. Adults with financial literacy skills have 82% more wealth than those who don't. From swimming lessons to piano classes, us parents invest in so many things to enrich our kids' lives. But are we investing in their future financial success? With Greenlight, you can teach your kids financial literacy skills like earning, saving, and investing. And this investment costs less than that after school treat. Start prioritizing their financial education and future today with a risk-free trial at greenlight.com/spotify. greenlight.com/spotify.

**SPEAKER_2** (0:30)
Growing your e-commerce business comes with plenty of hurdles, but shipping shouldn't be one of them. Well, here's some good news. Powerful e-commerce shipping software called ShipXcel from Pitney Bowes. With ShipXcel, you can generate discounted shipping labels for both online and offline orders. That saves time and money with everything right at your fingertips. Start your free trial of ShipXcel from Pitney Bowes today.

**Simon White** (1:00)
Remote causes are there. You've got high debt to GDP, you've got high fiscal deficits, you've got high primary deficit. You've got all those remote reasons why you could potentially get some sort of bond crisis. But the one that might be approximate cause is, who knows? You never really know ex ante what it's going to be, the interest payments. And the chart on the left there is trying to show that. Generally, in the run up to a fiscal crisis, you see interest payments start to become really high. So you're pretty much going to do it then, when you're having to basically borrow more to pay back your interest. And the market can see that the end game is closing.

**Adam Taggart** (1:45)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. The US is ramping up its issuance of treasury debt. Today's experts is concerned that this form of fiscal QE will lead to a resurgence in inflation, higher bond yields, a risk asset sugar high, a weaker dollar, and quite possibly a developed market bond crisis. To understand why, today we're fortunate to sit down with Simon White, macro strategist at Bloomberg and co-founder of the investment advisory firm Variant Perception. Simon, thanks so much for joining us today, all the way from London.

**Simon White** (2:20)
Yeah, nice to be here again. Thanks, Adam.

**Adam Taggart** (2:22)
Good. Well, it's great to have you back in the program, Simon. Always wonderful to see the lens through your eyes. I see your work an awful lot in my daily scouring of the internet and financial news articles and whatnot. You're a very prolific analyst. I also very much appreciate the fact that you sit outside the US. So you have a little bit more of a global view than the folks that I generally talk to and you have been outsiders view of the US market. So all that's valuable here. I do want to get into this whole discussion about fiscal QE, if we can get in there. And I know you prepared a couple of slides for us, which is great. I love it when my guests do my homework for me. But if we can, maybe since it's been a while since you've been in the program and you have that perspective I mentioned, I'm going to go back to a question I haven't asked that much recently.
What's your current assessment of the global economy and financial markets just from a 30,000 foot level?

**Simon White** (3:18)
Yeah, it's never an easy question to answer. I think particularly difficult this second half of the year. I was certainly more sure about things earlier in the year, end of last year. I think most egregiously for me is the stock market. That's the thing that's kind of caught me unaware. It was a bit of a I mean, the last number I saw was maybe 16% on average, but still significantly higher than what anyone was expecting at the beginning of the year, and yet markets at new highs.

**Adam Taggart** (4:14)
So that kind of- I start to interject, but it's like we have less uncertainty right now than we had right after Liberation Day, but we still have more uncertainty than we did coming into it, and yet stocks are at all time highs versus then. I agree, that's a little bit of a conundrum.

**Simon White** (4:30)
It's two steps back, three steps forward.
We've got free energy somehow, so it is a curious thing, but you always have to pay respect to the price. So far, I guess, Hartling is not the right word, but it's been logical in the sense that market hasn't rallied straight through because I perhaps expected once you get through new highs, a lot of people are underweight, and then you get this kind of surge of formal trading into the market. And that's kind of obviously hasn't happened so far. It feels like people are realizing that there is a lot of uncertainty still out there, even though things maybe weren't as bad as what they were, or seemed they were going to be in early April, they're still not great, and there are sort of headwinds approaching. So from my perspective, I think, I was clearer about the equity market continuing to rally at the start of the year. There's basically two things that really matter most for the medium-term trend of the stock market. First is as long as there's no imminent chance of a recession, or as a low imminent chance of a recession. By imminent, I mean three or four months hence. And second of excess liquidity, and excess liquidity, I take to mean the difference between real money growth and economic growth, if that is generally quite strong. And it was at the start of the year, and recession risk, imminent recession risk, was pretty low. So in that sense, the path of least resistance for the market is up. But coming in to very early this year, I'd say January, February, excess liquidity start to turn lower. And then the market did actually start to hit the buffer. Then, as I say, we went into April, things really took a turn for the worse. But we're back at new highs, but excess liquidity is not really recovered. It's not quite as weak as it was a few months ago, but it's still not strong as it was at the beginning of the year. Secondly, I think there's going to be cracks appearing in the jobs market. I think the jobs market really will start to portray signs of slowing this year. And I don't necessarily think it's going to fall off a cliff very quickly. Obviously, that's always a possibility. But there's a number of things I'm looking at that suggest that the wheels are going to start slowing rather than falling off altogether. And this all happens when you've got valuations still at all time high. So you've still got that underlying kind of risk there of a lot of potential energy for the downside if a lot of these realities start coming home to bite.