Deficit balloons

The Congressional Budget Office (CBO) released its Fiscal Year 2024 budget deficit estimate, revealing a significant shortfall. The federal budget deficit for FY 2024 totaled $1.8 trillion, marking an increase of $139 billion or 8% from the previous fiscal year's $1.7 trillion deficit. This represents the highest deficit level in three years despite steady economic growth and low unemployment rates. The CBO estimates that the government collected $4.9 trillion in revenue during FY 2024, an 11% increase from FY 2023. However, this was outpaced by federal outlays, which rose to $6.8 trillion, a 10% increase from the previous year.

• Outside of a brief period during the Covid pandemic, the US govt is running the largest peacetime deficits in history
• Historically, the government has run large deficits during times of war
• The deficit has been growing due to higher interest costs, increased spending, and a lag in tax revenue growth
• Our Federal debt level is over $33 trillion dollars
• The ratio of Debt-to-GDP is over 120%
• If you include unfunded liabilities like Social Security and Medicare, the actual Debt to GDP ratio could be as high as 300-500%
• On a long time horizon, high levels of debt to GDP lead to weakness in the currency, inflation, and higher interest rates
• We believe this is one of the most important long-term issues to be aware of

After Fed cuts, rates rise?

While the market was cheering the Federal Reserve’s 50 bps cut in interest rate last month, the interest rate on long-term bonds, which is widely used for interest rates on mortgages and consumer and corporate credit, has risen significantly since the event. The yield on the 10-year US treasury bond rose from a level of ~3.6% before the Fed meeting to a current level of ~4.07%. This follows a decline in the 10-year yield from ~4.6% earlier in the year.

• Consumers in the market for a home would be surprised that mortgage rates rose after the Federal Reserve cut interest rates
• This is a function of the fact that mortgage rates, as well as other consumer and corporate credit rates, are based on the longer-term treasury yield, usually the 10-year bond
• As opposed to the Federal Funds rate, which is the overnight funding rate that the Federal Reserve controls, the longer end of the bond market is market-driven
• The 10-year rate did come down by almost 100bps ahead of the Fed cut, effectively projecting the coming cut in rates
• While it isn't clear why the 10-year yield has risen, it is likely a combination of a reverse of the prior move lower, some potential future inflation worries, and some concern about the deficit

Google break-up?

The U.S. Department of Justice (DOJ) has taken a bold step by suggesting it may recommend breaking up Google's core businesses. This proposal comes in response to a federal judge's ruling in August that Google violated U.S. antitrust law with its search business. The DOJ is considering asking a federal judge to separate Google's search business from its other major products, including the Android operating system, Chrome web browser, and Google Play app store. The DOJ will present a more detailed framework in late November.

• We have long discussed that Google may become a focus of anti-trust government action
• This is considered to be the most significant action since the US showdown with Microsoft in the 2000’s
• This will likely take years to resolve but could weigh on the company
• With Google reportedly behind competitors on its AI strategy, this adds another headwind
• Given Google has been a darling big tech stock over the last decade+, it will be important to monitor this development

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