Unadorned Notes: November 10-13, 2024
U.S. Budget Deficit Surges; GOP Sweep Eases Debt Ceiling Risks; Inflation Meets Expectations, Eases Concerns; U.S. Stocks Lag in Real Terms; Bitcoin Surges Past $90,000 Mark
Economics, Finance, and Business
U.S. Budget Deficit Surges: The U.S. budget deficit reached $257 billion in October 2024, nearly four times higher than the previous year’s figure, due in part to one-off factors, according to the Treasury Department. Adjusted for calendar shifts and deferred tax payments from 2023, the deficit would have been about $47 billion, or 22% higher than October of the prior year. Federal receipts fell 19% year-on-year, while outlays rose 24%, driven by higher spending on Social Security, Medicare, and military programs. Despite the increase in spending, debt service costs dropped 8% to $82 billion, largely due to lower inflation adjustments on Treasury securities. President-elect Donald Trump will inherit a large fiscal gap, which he aims to address through budget cuts.1
GOP Sweep Eases Debt Ceiling Risks: A unified Republican government under President-elect Donald Trump may reduce the risk of debt ceiling standoffs that have destabilized markets in recent years. With control of Congress, the second Trump administration is expected to push through economic policies, including tax cuts and tariffs, potentially boosting growth but also increasing inflation and the budget deficit. Bond yields have risen in response to expectations of higher growth and inflation, while credit default swap spreads have narrowed, reflecting reduced near-term default concerns. However, some analysts warn that fiscal expansion under unified government could pressure U.S. credit ratings if deficits widen significantly. Moody’s recently cautioned that the country’s fiscal health remains vulnerable, which could eventually increase borrowing costs.2
Inflation Meets Expectations, Eases Concerns: U.S. consumer prices rose 0.2% in October 2024, bringing the annual inflation rate to 2.6%, in line with economists’ expectations. Core CPI, excluding food and energy, increased 0.3% month-over-month, maintaining a steady pace from previous months. The report eased market concerns, leading to a decline in Treasury yields and a slight rise in stock futures, as it suggests the Federal Reserve may proceed with a December 2024 rate cut. Analysts noted that stable inflation reduces pressure on the Fed to pause its easing cycle, though Donald Trump’s proposed policies could introduce new inflationary risks in 2025.3
Argentina Inflation Hits 3-Year Low: Argentina’s monthly inflation dropped to 2.7% in October 2024, marking its lowest level in three years, according to the national statistics agency. This decline is seen as a success for President Javier Milei’s administration, which has prioritized curbing the country’s severe inflation since he took office nearly a year ago. October’s annual inflation rate fell to 193%, down from 209% in September 2024. Milei’s government aims to maintain inflation below 3% through the end of the year, a target that has now been met. Despite progress, many Argentines continue to face hardship due to the administration’s austerity measures, including cuts to energy subsidies.4
U.S. Stocks Lag in Real Terms: Despite record highs in the S&P 500, U.S. equities are on track for their second-worst inflation-adjusted performance in 25 years, with annualized returns of just under 5%, according to Deutsche Bank. This modest gain trails historical averages and is projected to underperform assets like gold for the first time over a quarter-century period. The relatively weak returns stem partly from the high starting point at the peak of the dot-com bubble. Deutsche Bank analysts anticipate stocks will still outperform bonds over the next 25 years, as rising deficits may drive inflation. The report suggests continued market reliance on reflationary policies during economic crises.5
Bitcoin Surges Past $90,000 Mark: Bitcoin’s price surpassed $90,000 on November 12, 2024, continuing a strong rally since Donald Trump’s presidential election win. The cryptocurrency has gained 30% since November 5, 2024, and is now within 11% of the $100,000 milestone. Analysts had anticipated a pro-crypto Trump administration could boost Bitcoin, which has also fueled gains across crypto-related stocks. Coinbase shares have risen 75% since the election, while U.S.-based crypto miners Marathon Digital and CleanSpark posted significant gains. The broader market has responded positively, with the S&P 500 up 4.25% and altcoins like Solana also reaching multi-year highs.6
Fed Governor Supports Regulated Stablecoins: Federal Reserve Governor Christopher Waller argued that well-regulated stablecoins could lower global payment costs and serve as safe assets on digital platforms, though he cautioned about associated risks. Speaking at the Institute of Advanced Studies, he highlighted the need for guardrails to prevent issues like run risk and illicit use. Waller suggested that stablecoins and decentralized finance could complement traditional finance, potentially bolstering U.S. dollar dominance. Former House Speaker Paul Ryan also supported stablecoins as a means to sustain demand for U.S. Treasurys and counter China’s yuan. Despite regulatory interest, a Chainalysis report shows the U.S. is lagging in stablecoin adoption, with offshore exchanges capturing 60% of stablecoin transactions in 2024.7
AI Chip Loans Spark Caution: Major Wall Street firms have loaned over $11 billion to “neocloud” companies like CoreWeave and Crusoe, using Nvidia AI chips as collateral. These firms, which supply cloud infrastructure for AI, are heavily dependent on Nvidia’s GPUs, creating a circular financing loop that may inflate Nvidia’s earnings and leverage within the sector. Risks include the declining long-term value of chips as technology evolves, and the potential for increased supply from competitors like Microsoft and Google. Additionally, Nvidia’s dual role as both investor and supplier to these startups raises concerns over market transparency and concentration. Analysts warn that if financial engineering continues unchecked, it could lead to inflated valuations and a painful correction.8
U.S. Politics and Geopolitics
Trump Taps Musk, Ramaswamy to Slash Spending: President-elect Donald Trump has appointed Elon Musk and Vivek Ramaswamy to lead the new Department of Government Efficiency (DOGE), tasked with reducing federal spending and regulation. The commission, operating outside traditional government structures, will collaborate with the White House to recommend cuts and restructuring, with a goal of identifying $2 trillion in budget reductions. Critics argue that Musk’s target is unrealistic, as any major changes would require Congressional approval. Musk’s leadership has drawn scrutiny due to his extensive government business ties, while Ramaswamy has advocated for deep cuts to the federal workforce. The commission’s findings are due by July 4, 2026, but some doubt it will achieve significant results.9
Thune Elected Senate GOP Leader: South Dakota Senator John Thune has been elected as Senate Majority Leader, positioning him as a potential check on President-elect Donald Trump’s agenda. Thune’s victory is seen as a rebuke to Trump allies who supported Florida Senator Rick Scott for the role. While Trump did not endorse a candidate, he previously criticized Thune as a “RINO”. Thune’s leadership could affect Trump’s appointments, including controversial nominees like Matt Gaetz for Attorney General and Tulsi Gabbard for Intelligence Chief. Thune emphasized the need to confirm Trump’s cabinet swiftly, leaving open the possibility of recess appointments if the Senate faces delays.10
U.S. Considers Ending China Trade Status: China’s trade surplus reached over RMB 5 trillion through October 2024, potentially surpassing $1 trillion for 2024, raising concerns within the incoming Trump administration. The Chinese government plans to increase export support, as discussed in a recent State Council meeting. Meanwhile, U.S. lawmakers, led by Representatives Jason Smith and John Moolenaar, are preparing legislation to revoke China’s Permanent Normal Trade Relations (PNTR) status, signaling a shift toward economic decoupling. The move could lead to higher tariffs on Chinese goods, though it would stop short of the proposed 60% tariff level. Former U.S. Trade Representative Robert Lighthizer is advising on these efforts.11
Ishiba Retains PM Role Amid Challenges: Japanese Prime Minister Shigeru Ishiba retained his position after defeating opposition leader Yoshihiko Noda in a parliamentary run-off, despite losing his coalition’s majority in a recent election. Ishiba, who succeeded Fumio Kishida following multiple Liberal Democratic Party (LDP) scandals, now leads a minority government and must work with opposition parties to pass legislation. His leadership faces economic hurdles, including inflation and a weak yen, along with declining public trust in the ruling LDP. Ishiba has pledged to reform the LDP and address policy issues, but internal party tensions may complicate his agenda. Additionally, Donald Trump’s U.S. election victory raises concerns about potential trade tensions with Japan.12
COP29 Debates Fossil Fuels, Climate Aid: At COP29 in Azerbaijan, President Ilham Aliyev defended his country’s oil and gas industry, criticizing Western nations for “double standards” on fossil fuel reliance. UN Secretary General Antonio Guterres countered, urging countries to move decisively toward green energy to limit global warming to 1.5°C. The summit’s focus includes securing hundreds of billions in climate finance to aid developing nations in transitioning to clean energy. Ten major development banks pledged to increase climate funding to $120 billion by 2030. Amid growing climate impacts worldwide, leaders face pressure to make substantive progress despite geopolitical tensions.13
