Forward Guidance
August 6, 2025

Markets Haven’t Priced In The End of Fiscal Tailwinds | Andy Constan

Andy Constan of Damp Spring Advisors argues that the dominant "nothing stops this train" fiscal narrative is dead wrong. He explains why a powerful, tariff-driven fiscal contraction is already underway and what it means for the Fed, the dollar, and your portfolio.

The Fiscal Train Has Reversed

  • “Based on the numbers, the train has long since stopped. You add up tariffs and the Big Beautiful Bill, the train has stopped. In fact, it's going in reverse for now. My fiscal impulse is clearly contractionary.”
  • Contrary to popular belief, the era of massive fiscal tailwinds is over. While the "Big Beautiful Bill" provides a mild impulse, it's dwarfed by the impact of tariffs, which act as a roughly $400 billion tax on consumption. This combo flips the fiscal stance from expansionary to contractionary. The only wildcard that could reverse this is significant, yet-to-be-announced industrial deregulation.

The Fed Plays the Waiting Game

  • “There's never been a president that wants higher interest rates, but this one seems to want much, much lower interest rates—like irresponsibly low in my view.”
  • The Federal Reserve is signaling patience, with recent dissents reflecting a healthy internal debate rather than a fractured committee. Markets are not pricing in the dramatic rate cuts desired by the White House, suggesting a belief that the Fed’s independence will largely hold. Constan believes rates need to come down due to a slowing economy, but not at the politically motivated pace being demanded.

Treasury Pours Cold Water, Not Gasoline

  • “We got something closer to cold water versus something anything like gasoline, and the markets pretty much reacted to that.”
  • The recent Quarterly Refunding Announcement (QRA) was a non-event for those hoping for stimulus. The Treasury opted for a "cold water" approach, disappointing hopes for a "gasoline" outcome where it would halt long-term bond issuance. Furthermore, the modest increase in Treasury buybacks is described as "literally nothing" and is too small to meaningfully impact markets, which remain in a state of slight QT.

Key Takeaways:

  • The macro forces are clear: a secular shift away from overweight US assets is colliding with a domestic fiscal contraction. Ignore the high-frequency data noise and focus on the big picture.
  • Fiscal Headwinds Are Here. The ~$400B in annual tariff revenue has flipped the fiscal impulse from a tailwind to a headwind. The "run it hot" narrative is inconsistent with the data.
  • Own the Short End, Avoid the Long End. A secular supply overhang makes long-term bonds a poor bet. The trade is owning 2-to-5-year Treasuries to capture coming rate cuts driven by a slowing economy, while avoiding the structural supply issues of the long end.
  • The Debasement Narrative is Paused. A contractionary fiscal stance and a less-dovish-than-expected Treasury create a short-term bullish setup for the dollar and a bearish one for assets like gold. The dollar debasement trade is not a one-way street.

For further insights, watch the full discussion here: Link

This episode reveals a critical disconnect between the market's "debasement" narrative and the underlying reality of contractionary fiscal policy, challenging investors to look past momentum and re-evaluate the true drivers of the economy.

The Federal Reserve's Hawkish Stance

  • Key Insight: The Fed is not rushing to cut rates, signaling a cautious approach despite some internal disagreement.
  • Speaker Perspective: Andy views Powell's framing of the dissents as skillful, emphasizing that the committee is grappling with uncertainty, which is appropriate for the current economic environment.
  • Quote: "I like the way he framed it, which is this is a committee of people who don't know, aren't certain, and are in the midst of a real discussion."

Fed Leadership and Market Implications

  • Market Pricing: The SOFR (Secured Overnight Financing Rate) curve, which reflects market bets on the future path of the Fed's policy rate, is not pricing in aggressive rate cuts post-Powell. This suggests the market believes the Fed will retain a degree of independence regardless of who becomes chair.
  • Strategic Consideration: Investors should monitor the nomination for the next Fed governor closely. The choice will signal the future direction of monetary policy and could impact the composition of the FOMC, especially if a passed-over candidate like Waller decides to resign.

Deconstructing the Push for Lower Rates

  • Fiscal Dominance: This is a scenario where a country's debt and deficit levels are so high that the central bank is forced to keep interest rates low to ensure the government can afford its interest payments, potentially at the expense of controlling inflation.
  • Key Takeaway: The economic rationale for politically motivated rate cuts is not supported by the numbers. The market appears to be trading more on economic fundamentals than on political desires for lower rates.

The Quarterly Refunding Announcement: Pouring Cold Water

  • Treasury Buybacks: While the Treasury increased its bond buybacks, the change was a "diminutive" $8 billion per quarter, far less than the market hoped for and not enough to meaningfully offset the ongoing effects of Quantitative Tightening (QT), the Fed's process of shrinking its balance sheet.
  • Actionable Insight: The QRA confirmed the Treasury is not pursuing an aggressive, stimulative debt management strategy. This removes a potential tailwind for risk assets and reinforces a more restrictive liquidity environment.

Liquidity Drain: The TGA Rebuild

  • Impact on Liquidity: The TGA rebuild acts as a drag on net liquidity. While reserves are currently abundant, this drain could create stress points, especially for individual banks with lower reserve levels.
  • Investor Watchpoint: The shrinking RRP and bank reserves are key indicators of tightening financial conditions. Investors should track these balances as they approach the "lowest comfortable level of reserves," which could mark an inflection point for markets.

The Fed's Balance Sheet and the Missing Reinvestment Plan

  • The Problem: The Fed is "still digging" by adding long-duration assets it doesn't want, extending the maturity of its portfolio. A change to stop these purchases would force the private market to absorb more long-term bonds, a tightening measure.
  • Strategic Implication: The lack of a new reinvestment plan represents a major unknown. A future shift to stop buying long-term bonds would be a significant headwind for the bond market and could be seen as a hawkish policy change, contrary to political desires.

The Real Fiscal Impulse: Contraction, Not Expansion

  • Quote: "Based on the numbers, the train has long since stopped. In fact, it's going in reverse for now. My fiscal impulse is clearly... contractionary. There's no way around it."
  • Actionable Insight: The prevailing market narrative of a massive, ongoing fiscal stimulus is wrong. Investors basing decisions on the "nothing stops this train" thesis are ignoring the significant drag from tariffs, creating a potential vulnerability in portfolios positioned for endless fiscal support.

Navigating the Data and Market Narratives

  • Current Positioning: Given the contractionary backdrop, Andy is bullish on the U.S. dollar and bearish on gold and, by extension, Bitcoin. He favors short-to-intermediate duration bonds (2-5 years) over long-duration bonds (10-30 years), which face a secular supply overhang.
  • Term Premium: This is the additional yield investors demand to hold a long-term bond over rolling over a series of short-term bonds. Andy notes that with low term premium and a flat/inverted yield curve, the classic "carry trade" of owning long bonds is unattractive.

Stablecoins: A Sober Look at the Marginal Bid for T-Bills

  • The Zero-Sum Game: For most transactions, when a person buys a stablecoin with dollars from a bank account, it's a net-zero event for the financial system. The buyer's dollars are transferred, requiring an asset to be sold elsewhere to provide that liquidity, which the stablecoin issuer then uses to buy a T-bill. No new net demand is created.
  • The Real Source of New Demand: The only significant source of new demand for T-bills from stablecoins comes from converting physical U.S. dollars (cash) held abroad into digital stablecoins. This takes untracked cash and brings it into the formal financial system.
  • Growth Outlook: While Andy expects stablecoins to grow meaningfully, he believes they will not generate trillions in new demand for T-bills. Their primary growth will be as a payment rail and a way to disintermediate the premium on physical dollars in foreign countries, not as a primary savings vehicle for U.S. investors who have interest-bearing alternatives.

Conclusion

This episode argues that markets have not priced in the end of fiscal tailwinds; in fact, they are facing a contractionary reality. Investors should critically re-evaluate the "debasement" narrative and consider positioning for a slowdown, favoring the dollar and short-duration assets over assets dependent on continued stimulus.

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