To The Moon

This is a disturbing tweet from Twitter user The Kobeissi Letter

@KobeissiLetter

Screenshot of the tweet

The U.S. Now Has:

1. Record $16.5 trillion in household debt

2. Record $11.9 trillion in mortgages

3. Record $1.6 trillion in auto loans

4. Record $986 billion in credit card debt

Total mortgage debt is now more than double the 2006 peak. Meanwhile, 36% of Americans have more credit card debt than savings with balances rising at the fastest pace since 1999. This is all while mortgage rates just hit 7.1% and credit card debt rates hit a record 24.9%. We are "fighting" inflation with debt. This can't end well.

Meanwhile, interest rates are rising at their fastest pace in history. The average payment on a new mortgage has risen by 61% in just 18 months. The average American is spending a record 46% of their income on house payments. Debt is being used to purchase basic necessities.

The worst part? The US government now has $31 trillion in debt. That's expected to hit $50 trillion within the next 10 years. Annual interest on this debt is set to cross a RECORD $500 billion this year. Follow us at @KobeissiLetter as we track rates and the debt crisis.

Does the US have a debt cancer?

From the government to the governed, there is a trail of debts plaguing the United States of America. Sometimes, I wonder if it is partly due to the example set by the government. There is a Chinese saying 上樑不正，下樑歪。

This can be translated into the following:

If the upper beam is not straight, the lower ones will go aslant. When the superiors (or parents) do not set a good example, the subordinates (or children) are not expected behave well.

If the government does not need to watch their budget and spending, is there a need for the people to follow suit? Precedence has been set for decades. Leaders have influence beyond their office and this to me, is an area of concern. Financial responsibility needs to be a

In business management, not managing the business budget & financials can lead to business downfalls. Investors do not have tolerance should businesses fail to keep within their budget. This is even more concerning when the business is already in deficit.

Allianz Group sharing about falling off a savings cliff for both US & Europe in this 2nd Feb 2023 report.

Source: https://www.allianz.com/en/economic_research/publications/specials_fmo/saving-usa-europe.html

Families are struggling partly due to the rise in costs of living (inflation) and now they are hit by a double whammy of an increase in interest rates. This implies that any debt they have incurred will cost more in repayments. Unfortunately, we have a worrying trend of families turning to credit facilities to meet their household needs. It is one thing if you splurge on an expensive holiday on credit but it must be utterly frustrating that you need to borrow just for household needs and essentials. With massive drawdowns of savings, the trend of falling savings and increasing debt are pointing to defaults and financial ruin.

One of the aims to tackle inflation is to dampen demand. However, it seems that there are more families falling under the line. Demand erosion is likely to lead to a financial crisis in the coming days. It seems that the path of the government is set to heighten the interest rates and we can expect collateral damages in the months to come.

The government spending

This is one of the top resources coming to government spending: https://www.pgpf.org/blog/2023/02/interest-is-skyrocketing-and-the-national-debt-will-reach-an-all-time-high-in-just-5-years

In this recent 15 Feb 2023 article, below are some of the key takeaways from CBO’s report:

1. The national debt will reach its highest point in history within the next decade.

2. Deficits will rise over the decade.

3. Interest costs will nearly triple in the next decade.

4. Long-term interest rates will remain near current levels throughout the next decade.

5. Social Security and Medicare are key factors in spending growth.

6. Trust funds for both Social Security and Medicare will become depleted within the next decade.

7. Revenues won’t keep pace with the growth in outlays.

8. The fiscal outlook is not improving.

Coming to government spending, there is a difference as the impact goes beyond selected households. With USD the world’s reserve currency, the impact can be felt worldwide when the US has issues with its economy.

It could be the US tripping over itself. While the previous market crashes due to selected industry players, will the coming crash be largely due to the mismanagement of the US government?

One of the concerns will be the interest costs that the government needs to pay back after borrowing to fund its various projects. Here is an extract from the PGPF website:

Interest costs will nearly triple in the next decade. The Federal Reserve has increased interest rates eight times since early 2022 to combat high inflation — which has contributed to the significant increase in the federal government’s cost of borrowing. In CBO’s projections, such costs would rise from $475 billion in 2022 to $1.4 trillion in 2033. Over the upcoming decade, CBO projects that net interest payments will total $10.5 trillion; relative to the size of the economy, net interest would grow from 2.4 percent this year to 3.6 percent in 2033. In 2030, the ratio of interest to GDP would total 3.3 percent, the highest recorded since 1940 (the first year for which such data are reported).

Net interest costs are projected to exceed the previous high relative to the size of the economy in 2030

There is a cost to borrowing money from the future to fund the present projects. This cannot be sustainable in the long run. While the news media continue to villanize “common enemies” of Russia, Iran & China, the US government is robbing its own future.

The competitiveness of onshoring

In the name of the security of strategic commodities, some companies have started to onshore, setting up manufacturing in the US once again. We need to understand that the chips industry in the USA may not be able to produce chips at competitive rates especially when the raw materials, supply chain and labour overheads are significantly different. To support these onshore industries, purchasing these compared to “cheaper alternatives” could set back the competitiveness of the US companies. This should turn out to be inflationary in price impact. Some may argue that there is not much room to wriggle out as it is an essential commodity. The total costs of ownership should end up being more.

My investing muse

It is easy for writers like me to pen such a bearish outlook as the evidence is available in abundance. I hope that there is still time for the market to address these issues. Would the Fed pivot soon and send the market to the moon? Some of the market bears have advised that the coming crash could rival the previous crashes in 2000 & 2008. Thus, I remain hesitant to make long-term investments as the collapse could be spectacular. This implies that I could miss out on great opportunities to buy great companies at good discounts. To me, it is no longer a question of if but rather when. Let us spend within our means, avoid leverage and save up cash for the crash. It could take months and I hope that I am wrong. Let us pay attention to the various macro data for reference.

@TigerStars

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