A Tidal Wave of Debt

Bill Bonner, writing today from Baltimore, Maryland

When Mr. Trump spoke of a Golden Age in his victory speech, we immediately thought of the Golden Age of Greece… when Pericles delivered his famous funeral oration. Athens was at war, and many people thought they should give it up, sue for peace… and get back to work. Not Pericles. He saw an opportunity to Make Athens Great Again.

Pericles was a ‘war hawk’… and no slouch as an orator. The Athenians rallied around him, put on their panoplies — sword and shield — and the war cries resounded through the city as the menfolk, young and old, marched out to combat.

Uh oh… the result was a crushing defeat in which the Athenian empire was destroyed, the city itself conquered, occupied by foreign troops… and its population sold into slavery.

Not a good example for the uplifting spirit we’re looking for today…

So, we turn back to Donald J. Trump.

And one of our Dearest Readers writes:

Yes, there’s an entire mountain range of debt, but what if Trump’s policies actually do make things better? What if manufacturing does return to the US in a huge way? (Does America have any choice other than to incentivize it?) What if energy prices do drop 30-50%? What if regulations and federal government employment are meaningfully cut? What if the economy does start growing at 4-6%?

Scott Bessent, BSD on Wall Street, and mentioned as a possibility for Trump’s Secretary of the Treasury, had this to add. In the Wall Street Journal:

The failure of Bidenomics is clear. But Mr. Trump has turned around the economy before, and he is ready to do so again. [Nobel winning economists] may not understand this, but the financial markets have clearly spoken.

And not since Herbert Hoover’s election in 1929 have they shouted out so loudly. Bitcoin traded over $89,000 this morning. The Dow was falling, but still near a record high.

Mr. Bessent at least nods in the direction of the tidal wave of debt soon to wash over the new administration. “Mr. Trump must also address government borrowing,” he says. But he thinks the problem is that it is ‘expensive shorter-term debt’ that must be ‘deftly handled.’

Well… good luck with that! The problem is not the term, but the amount. Mr. Bessent needs to listen to the market more carefully. It’s saying that interest rates will have to go higher to cover it. MarketWatch:

10-year Treasury yield breaks through key resistance levels on way to 5%

Since mid-September, the widely followed yield has risen past one resistance level after another, starting with 4.21% and 4.3%, the latter of which is described as a proverbial line in the sand that has begun to cause problems for the stock market over the past year… The rate has jumped about 80 basis points from its 52-week low of 3.62% reached on Sept. 16.

Already, the feds paid $1.13 trillion in interest on the US debt over the last twelve months. It’s unlikely that that amount will go down — not with rates rising and debt increasing by $3 billion per day.

And now that the markets have got a good look at the approaching tsunami, they may figure that it’s time to head to higher ground. As reported in this space, the feds need to refinance $16 trillion in the next four years. Add to that amount deficits that are expected to come in at $2 trillion per year.

Investors might also recall that The Donald added $8 trillion to US debt during his first term. So, it wouldn’t be hard to imagine a total of nearly $44 trillion by the end of this term, with much of it sporting a 5% yield. That would mean interest payments of over $2 trillion per year. How are the feds going to handle that, investors will want to know? With more printing press money?

To make matters worse, only days after the election, Trump is already bringing in his hawks — war hawks, trade hawks, China hawks. Notably absent, so far, are the budget hawks — people who want to reduce federal deficits by cutting spending or raising taxes.

They are probably absent because they don’t exist. Members of Congress, political hacks, lobbyists and ‘influencers’ of all types earn their money and power by spending the public’s money, not by saving it. And like a Freudian nightmare, in the absence of serious budget cutting, the ‘Golden Age’…turns into the something much less appealing.

More to come…

Bill Bonner, writing today from Baltimore, Maryland

Uh oh… the result was a crushing defeat in which the Athenian empire was destroyed, the city itself conquered, occupied by foreign troops… and its population sold into slavery.

Not a good example for the uplifting spirit we’re looking for today…

So, we turn back to Donald J. Trump.

And one of our Dearest Readers writes:

Yes, there’s an entire mountain range of debt, but what if Trump’s policies actually do make things better? What if manufacturing does return to the US in a huge way? (Does America have any choice other than to incentivize it?) What if energy prices do drop 30-50%? What if regulations and federal government employment are meaningfully cut? What if the economy does start growing at 4-6%?

Scott Bessent, BSD on Wall Street, and mentioned as a possibility for Trump’s Secretary of the Treasury, had this to add. In the Wall Street Journal:

The failure of Bidenomics is clear. But Mr. Trump has turned around the economy before, and he is ready to do so again. [Nobel winning economists] may not understand this, but the financial markets have clearly spoken.

And not since Herbert Hoover’s election in 1929 have they shouted out so loudly. Bitcoin traded over $89,000 this morning. The Dow was falling, but still near a record high.

10-year Treasury yield breaks through key resistance levels on way to 5%

Since mid-September, the widely followed yield has risen past one resistance level after another, starting with 4.21% and 4.3%, the latter of which is described as a proverbial line in the sand that has begun to cause problems for the stock market over the past year… The rate has jumped about 80 basis points from its 52-week low of 3.62% reached on Sept. 16.

More to come…

Back in April, when we published what we called the Trump Great Reset Strategy, we described the grand realignment we believed President Trump and his acolytes were embarking on in three phases.

At the time, it read like a conceptual map. As the months passed, it began to feel like a set of operating instructions written in advance of turbulence.

As you can expect, any grandiose plan would get all kinds of blowback… but this year exhibited all manner of Trump Derangement Syndrome on top of the difficulty of steering a sclerotic empire clear of the rocky shores.

The “phases” were never about optimism or pessimism. They were about sequencing — how stress surfaces, how systems adapt, and what must hold before confidence can regenerate. And in the end, what do we do with our money?!

Relative to GDP, the net international investment claim on the U.S. economy was 20% in 2003. It had swollen to 65% by 2023. Practically every type of American company, bond, or real estate asset now has some degree of foreign ownership.

But it’s even worse than that. As the federal deficit has pumped up the GDP figures, and made a larger share of the economy dependent on government spending, the quality and sustainability of GDP have deteriorated. So, foreigners, to the extent they are paying attention, are accumulating claims on an economy that has been eroded by inefficient, government-directed spending and “investments.” Why should foreign creditors maintain confidence in the integrity of these paper claims? Only to the extent that their economies are even worse off. And in the case of China, that’s probably true.

As global government interest expense climbed, gold quietly followed it higher. The IIF estimates that interest costs on government debt now run at nearly $4.9 trillion annually. Over the same span, gold prices have tracked that burden almost one-for-one.

Silver has recently gone along for the ride, with even more enthusiasm.

Since early 2023, Japan’s 10-year government bond yield has risen roughly 150 basis points, touching levels not seen since the 1990s.

Over that same period, gold prices have surged about 135%, while silver is up roughly 175%. Zoom out two years, and the divergence becomes starker still: gold up 114%, silver up 178%, while the S&P 500 gained 44%.

According to the American Association of Individual Investors, the average retail investor has about a 70% allocation to stocks. That’s well over the traditional 60/40 split between stocks and bonds. Even a 60/40 allocation ignores real estate, gold, collectibles, and private assets.

A pullback in the 10% range – which is likely in any given year – will prompt investors to scream as if it’s the end of the world.

Our “panic now, avoid the rush” strategy is simple.

Take tech profits off the table, raise some cash, and focus on industry-leading companies that pay dividends. Roll those dividends up and use compounding to your overall portfolio’s advantage.