Two Ways

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

“What brought it on?”

“Friends,” said Mike. “I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.”

— Ernest Hemingway, “The Sun Also Rises”, 1926

Soft, then hard.

Excess

Excess is everywhere. Time to re-read some truth.

Fiscal Mismanagement

Debt

According to the US Treasury’s “Debt to the Penny” website, FY 23 closed with total Federal debt of $33,167,334,044,723.16. At the close of the first month of FY 24 Federal debt totaled $33,699,580,339,128.49, an increase of $532,246,294,405.33.

Read And Weep

“After decades of excess, the economy is addicted to perpetual stimulus and deficit spending. The prevailing social mindset assumes that unending, debt-fueled growth is the natural state of affairs. With little political will for discipline, reform may depend on a crisis to force change. In the meantime, politicians, paralyzed by the status quo, are unlikely to make the difficult choices that could preempt such a crisis.”

— The Specter of Hyperinflation Looms over the Economy

“A Politico report from last week details how White House aides are now telling members of Congress to sell Americans the lie that continuing to send money and weapons to Ukraine is good for the economy….

(explanation of Bastiat’s broken window fallacy)

… We have so far been forced to pay for over $44 billion worth of weaponry for Ukraine and $3.3 billion per year in military aid to Israel. Now another $60 billion for Ukraine and $10 billion for Israel have been proposed. This spending would increase the burden that has already been forced on the American people. If Biden, McConnell, and their supporters think Americans have an obligation to shoulder that cost, they should at least have the decency not to pretend it’s making us more prosperous.”

—  Don’t Fall for Biden’s Latest Talking Point

The Great Repricing

What I call “The Great Repricing” is underway in Treasuries and CRE. Other rate-sensitive markets including housing, stocks, cars and trucks, boats, aircraft, etc., are in denial and have yet to react in any significant way. Rick Santelli’s quick overview is gospel. John Hussman’s detailed analysis is valuable although overly optimistic in the sense that his targets are based on nominal 10% returns when I think 20% will be more like it to achieve positive real returns. The government just announced that it will borrow $1.5 trillion over the next two quarters. I call BS. Spending will be much higher than forecast and revenue will be lower. Inflation will heat up again. Biden’s handlers will spend like crazy to make the economy look superficially good going into the 2024 election, as well as supporting their wars. Even current rates and inflation will hamstring investment and slow the economy as affordability for all the things mentioned above drops rapidly. Anyone who just sits there will find themselves in deep doodoo. This is TEOTWAWKI. There will be no safe harbor, although commodities may provide good gains at some point as they are historically cheap. Some time ago, I was shown the price history of an early 1900s house (the records came with the house). During the Great Depression, the house sold for 10% of its previous purchase price. Legendary stock speculator Bernard Baruch, when asked the secret of his success, replied: “I always buy too late and sell too early.” It still applies, just remember order is not specified.

Higher For Much, Much Longer?

Jim Grant, publisher of Grant’s Interest Rate Observer, points out a possible turning point:

Why do you think a new cycle may have begun in the bond market?

Here’s one way to think about it: In 1981, President Reagan saw that the air traffic controllers’ union was threatening to strike. So he warned them not to strike, arguing it’s against the public and it’s illegal. The air traffic controllers struck anyway, so Reagan fired them all and brought in new ones. That was about the time when interest rates peaked. It was a marker of the times. Back then, we didn’t know that this was the end of a 45-year bond bear market. It was a symbolic end: President Reagan broke this important union. It was a change; it was like commodity prices breaking in 1980.

And what does this have to do with the current situation?

Fast forward to today, another President, Joe Biden, goes out to Detroit. He walks the picket line in solidarity with the strikers of the auto union, encouraging them: «Hang in there, you got it!» To me, that is another sign of the times, another kind of omen. So it might just be that we are embarked on rates much, much, much higher for much, much, much longer. And, it might just be that we are embarked on not just a cycle of inflation but an age of inflation.

The size of the government deficit continues to increase. Money = Credit. Credit = Money. This isn’t the Fed’s QE where the Fed bids for the Treasury debt, driving up the price in order to lower interest rates. Instead, the group of commercial banks selected by the Treasury bids for the bonds at commercial prices. The proceeds of the bond sales are deposited in the TGA, the Treasury General Account, which is held by the NY Fed. This is new money (the deposits of the commercial banks are unaffected). Government checks are written against the TGA. Although it is held by the Fed, the TGA is not a bank reserve account, it is spendable money.

Find My Mistake, I Beg Of You

If you go to “Debt To The Penny” the closing balance for the last month, 30 days, COB 9/11 to 10/10, increased by $609.6 billion. Extend 30 to 365 days and you get $7.4 trillion of new debt.

Suddenly

Since the federal debt passed through $33 trillion two weeks ago, the Treasury has added another $0.442 trillion. The character Mike Campbell in Hemingway’s 1926 novel “The Sun Also Rises” was asked “How did you go bankrupt?” “Two ways,” he answers. “Gradually, then suddenly.”

Where We Go From Here

It is pretty clear that the Uniparty has no ability or intention to reduce spending. The good news is that this is a classic socialist inflation so we know what is going to happen. You might recall the Venezuelan path that I have mentioned before. For current details, try this link.

Now at $33 trillion, the Federal debt is large enough that a debt spiral is underway. The bond vigilantes are back, and the bear steepener appears to be underway in Treasuries. Regardless of what Powell does with short rates, the longer term rates will be headed up. Recall that in 1994, James Carville, a political adviser to President Clinton, famously remarked that if there were such a thing as reincarnation, he would like to be reincarnated as the bond market. By this he meant that he would like to wield the bond market’s immense power to discipline and rein in errant economic policymakers by driving up interest rates.

After so many years of low or negative rates asset valuations have gone to extreme heights and will now head for the opposite extremes. Defaults and bankruptcies are already rising. John Hussman’s chart, below, forecasts a 65% loss in the S&P 500.

Unfortunately many economies around the world are simultaneously in similar situations. China, for example, is struggling to deal with the collapse of its housing bubble. Some economists believe that there is enough vacant housing in China for a billion people, while population growth has turned negative. There are numerous other housing bubbles around the world (That means you, Vancouver).

While the Great Depression was deflationary, it now appears that this one will be inflationary, more like the Venezuelan model, where inflation is currently running at 400% per year. Food and energy shortages can be expected. A wild card, and not in a good way, are the globalists and their attempts to stoke fears of a global climate emergency which means the use of fossil fuels and agriculture must be curtailed or abandoned. Commodity prices may hold up well in real terms.