Despite the many differences between Japan and the US, there is one similarity that continues to matter most in the risk management model my colleagues and I use at Hedgeye, our research firm — debt as a percentage of GDP. Now that the US can’t cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing — buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It’s a point from which it’s almost impossible to return.
June’s trade deficit swelled 18.8% to $49.9 billion, the highest since October 2008. That was much worse than Wall Street predicted — or what the Commerce Department estimated in the recent Q2 GDP report. The new report, along with recent inventory data, suggest Commerce will revise down Q2 economic growth from the already-sluggish 2.4% annual rate to about 1%, according to Action Economics. Action Economics is looking for stronger retail inventory figures later this week that would imply a 1.4% GDP pace.
Government economists had expected the deficit to widen but the June data surprised everyone.
The report was “spectacularly terrible,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
“We are not seeing a huge impact from the lower rates in terms of refinancing and this is likely due to borrower burnout,” said MBA spokeswoman Carolyn Kemp. “As rates have been historically low for some time now, the pool of borrowers who were eligible to refinance have likely already done so.”
“It’s unprecedented” that such a historically low rate has failed to incite buying or refinancing stampedes, said Greg McBride, senior financial analyst for Bankrate.com. “But at the same time it’s not a big surprise. … I don’t view it as an oddity … It’s the job market.”
“The pace of recovery in output and employment has slowed in recent months,” the Fed said in its statement. It said while it still expects the economy to grow, the improvement will be “more modest in the near term than had been anticipated.”