Summary
A particular chart has caught the author’s attention, causing them to explore "rabbit holes" that shape their investing and trading thesis. The chart is the U.S. Treasury Note market, which has declined by 18.64% over the last 40 months. This decline has dire consequences for banks required by law to purchase U.S. Treasury assets, leading to a wave of insolvency among financial institutions. Meanwhile, politicians have agreed to raise the debt ceiling, effectively enabling continued borrowing and deficit spending, despite its long-term unsustainable nature.
The Crushing Weight of Debt
One of the most astounding realities about the current economic landscape is the staggering growth of U.S. public debt over the past four decades. Since 1980, DEBT has grown from $994 billion to a whopping $28 trillion, as of January 2023. The United States now owes more than it earned in the entire history of its existence! What’s even more astonishing is that this debt has been growing despite the relatively low interest rates and a GDP that’s barely keeping pace.
The consequences of this unsustainable debt burden are severe. In a world where governments can stack old debt upon new debt with impunity, there comes a point when you can no longer manage to keep the debt payments comparable each year. And in an increasing interest rate environment, we’ve reached that tipping point. The U.S. government is now refinancing all its debt obligations on the short end of the yield curve. This means most public debt will be auctioned off on the 3-5 year end of the yield curve to try and offer investors higher returns.
But there’s a dirty little secret in this strategy, economists refer to it as "crowding out." When the government increases its spending or borrows more money, it competes with private sector investment. This increased demand puts upward pressure on interest rates because loanable funds are limited. As a result, businesses and individuals have higher borrowing costs, discouraging private investment.
The BRICS Challenge
As governments continue to seek funding for their operations in this increasingly unstable economic environment, there’s another player that will soon pose an even greater challenge – the BRICS+ coalition (Brazil, Russia, India, China, South Africa). The combined GDP of these nations has surpassed $29 trillion dollars, and if measured by purchasing power parity (PPP), they amount to a staggering 54% of global GDP. These countries are also among the world’s largest oil producers.
The rise of BRICS+ poses significant geo-political risks for Western nations. As governments continue to prioritize short-term debt financing at higher rates, there will be substantial pressure on these governments to fund their operations with increasingly expensive debt service costs. But that’s where it gets really complicated. A dirty shirt is still a dirty shirt, and no matter how many times you clean and rewash it, the dirt is always there.
In this backdrop, getting back to looking at the U.S Treasury chart again, in view of all new information, my conclusion would be that with trillions of new debt pouring into the market, the government will have to keep inflation low and interest rates high to maintain a real positive rate of return. Only then can investors avoid holding "toxic assets" like U.S. Treasuries.
The Future of Investing
As I write this article, there are millions of people around the world wondering how their investment portfolios fared in recent years. And as we all know, no one has a crystal ball that can predict what will happen next year or five years from now. But I do have an answer – AI! We live in uncharted waters where traditional economic logic breaks down.
In times of rising interest rates and decreasing yields on bonds and cash investments, your only solution is to bet against those things you are most confident will go down during a given period. This has led many investors into much shorter time frames using everything from day trading to 1-second charts trying to ride these yield chases.