"The Big Loss"
Avoiding irreparable damage as the storm clouds gather...
by Bill Bonner
Paris, France - "First up: Bloomberg, with another milestone on the road to ruin: "U.S. Debt Interest Bill Soars Past $1 Trillion a Year." The combination of high levels of debt and higher interest rates has pushed the annualized interest cost of government debt past $1 trillion, an analysis from Bloomberg showed Tuesday. The cost of servicing US debt has doubled in the last 19 months. Interest rates are up. And so is the amount of debt. Together, like a ship caught in polar ice, they crush the hull. US debt is now $33.5 trillion. And there’s a lot more where that came from. Federal deficits of $2 trillion per year are becoming ‘the norm.’ By 2030, they’ll probably be around $3 trillion per year." And that is without any emergency spending!
“The Big Loss”: But rising debt levels and soaring interest payments are bound to set off alarms somewhere – subprime debt? Stocks? Real estate? Which brings us back to yesterday’s question: where is the next Big Loss coming from? The ‘Big Loss’ is the biggest financial danger older people face. It can wipe out a whole career of earning, saving, and investing. And if you’re over 55, you’re not likely to have time to recover.
So, what threatens a big loss now? Remember, it has to come as a big surprise. So, where’s the surprise? Stocks are still expensive…by some measures they are as expensive as they’ve ever been (especially the huge, leading tech stocks). Would it surprise us if they went down? Or even crashed? It shouldn’t. And what about houses? They’re at the top of their range too; shouldn’t they go down? It seems almost inevitable that they will. The average household can no longer afford the average house; something’s gotta give. No surprise there, either.
And what about AI? It’s the latest tech fad that is supposed to make us all rich. Just as the internet brought the whole world’s knowledge to our fingertips, now AI will help sort it out. “Experts” say it will increase productivity so much we’ll be able to pay our debts…finance our sprawling firepower industry…and get every member of Congress re-elected. And the best thing; it’s the perfect new technology for a declining, mentally-enfeebled empire. We don’t have to think about how to ‘Make America Great Again.’ AI will figure it out for us.
The Steepest Decline: But our guess is that AI will prove to be a big flop, just like the internet itself. People will use it routinely. Will it improve productivity? Yes…and reduce it too. Users will waste their time with it…playing games and talking to sex robots. Some tasks will be easier. Others will be made more complicated by AI-enhanced thieves, incompetents and propagandists. Overall, it will make little difference. Will it make some investors rich? Surely. But most of the claims and promises made for AI will prove false…and many people will take losses. Still, the Big Loss will probably come from elsewhere.
What about the bond market? It’s just endured the longest, steepest decline in its history. That alone suggests that the worst is over. Investors expect a bounce. Or even a complete turnaround. And here is where it becomes interesting. Everybody knows, you don’t ‘fight the Fed.’ And everybody knows the Fed has completed its tightening cycle.
Barron’s: "The Fed is done raising rates. The October employment report did it. The Federal Reserve’s tightening cycle is over. After 11 rate increases since March 2022, totaling five percentage points, the Fed ought to be finished raising rates. Inflation is falling and growth is slowing… Friday’s employment report confirmed what a host of other indicators are telling us, namely that the U.S. economy is finally slowing after an 18-month onslaught of Fed rate hikes. Together with falling rates of headline and core inflation, as well as moderating wage pressures, a clearer picture has emerged. The Fed will soon accomplish its goal of reducing U.S. inflation to the 2% core rate that it defines as “price stability.”
Everybody knows, too, that the Fed will soon begin to loosen up. The Fed Funds Futures market tells us that investors expect the Fed to “Pause” until May of next year…and then begin to cut rates. There’s a time to be a lender…and a time to be a borrower. Borrowing was a lay-up for most of this century. Especially in the depths of the Covid Panic. If you’d locked in a 3% mortgage rate then, you might have made the best financial move of your entire life. Your house payments would be fixed at an extremely low interest rate…while both principal and interest payments are reduced, year after year, by inflation.
Even at an inflation rate of only 4%...you’d make a profit on your borrowed money of 1% per year. And your gains are cumulative. After inflation, both the principal and the payments on your mortgage have gone down about 20%. But while the giddy, glory days of borrowing money are over…have the happy days of lending already arrived? Is it time to buy bonds again? Or is that what ‘everybody knows’…that just ain’t so? More to come…"
