To The Moon

What are the leading concerns in the robust, record-breaking economy?

Debt is probably the leading macro concern despite the record runs for the S&P500 index, crypto and some stocks like Palantir hitting an all-time high.

Debt is one man’s liability and another man’s asset.

The below chart is provided by Visual Capital in 2023.

A chart showing the breakdown of S&P 500 revenues

What is the debt situation in America for the government, state, businesses and consumers?

US debts come from a few sources including Government debt, state debt, corporate debt and consumer debts.

Government Debt: The U.S. federal government's national debt has reached a record high of approximately $36 trillion. This figure is a combination of debt held by the public and intragovernmental holdings. The debt-to-GDP ratio is currently around 120%, with projections indicating it could rise to 192% by 2053 if current fiscal policies continue without change. The interest on this debt is expected to become one of the largest expenditure categories, potentially surpassing defence spending, with costs projected to increase significantly due to rising interest rates. The federal government finances its deficits by issuing Treasury securities, which are held by domestic and foreign investors, including major foreign holders like Japan and China.

US Federal’s debt for FY2023

The U.S. government spends 37% more than it makes, with ~$36TN in national debt. Consider the analogy on an individual scale: a family that makes $80k/year while spending $110k, with a $525k mortgage & $35k car loan requiring $30k+/year in interest payments. - from X user Vivek Ramaswamy

Federal debt will soon eclipse its all-time high of 106 percent of Gross Domestic Product (GDP), which was reached just after World War II. What is worse, the nation’s debt is projected to continue rising in the future due to a structural mismatch between federal spending and revenues. Debt rising unsustainably threatens the country’s economic future, and a number of business leaders have signaled their concern. - PGPF.org post

This Federal debt is NOT sustainable.

State Debt: State debt varies widely across the U.S., with some states like Hawaii having high per capita government debt at $13,681.67, while others like Idaho have relatively low debt at $3,107.52 per capita. States often finance their budgets through bonds, which can be influenced by their fiscal policies, economic conditions, and legislative decisions. Notably, states like California have high levels of debt due to large infrastructure projects and other expenditures, while states with lower debt might benefit from policies that minimize borrowing or have higher revenue streams.

Some states struggle with state deficits.

Figure 5 - State Faces Growing Multiyear Deficits

The state of California has faced significant budget problems over the last two years—by our estimate, a $27 billion deficit in 2023‑23 and a $55 billion deficit in 2024‑25 (excluding early action taken this year). Yet, over this time, the Legislature did not use much of the state's reserves. - LAO CA report

Is this sustainable?

Business Debt: Businesses in the U.S. have also accumulated significant debt, which includes corporate bonds, loans, and lines of credit. The business environment has seen an increase in debt levels due to low interest rates in the past, encouraging borrowing for expansion or operational needs. However, with rising interest rates, the cost of servicing this debt increases, potentially impacting business investment and growth. Businesses' debt management is crucial as it affects their financial health, especially in sectors sensitive to economic cycles like real estate or manufacturing.

As of July 1, 2024, outstanding corporate debt in the United States was mostly composed of investment grade securities, rather than speculative grade ones. Of the 11.9 trillion U.S. dollars of outstanding U.S. corporate debt that has been rated, just under 3.2 trillions was rated as speculative grade. Approximately 74 percent of the total rated debt was issued by non-financial corporations. - Statista Post

Consumer Debt: Consumer debt in the U.S. has been rising, reaching approximately $17.1 trillion in 2023. This includes mortgages, auto loans, credit card debt, and student loans. Credit card debt saw a notable increase of 17.4% in 2023, largely due to increased consumer spending and a higher proportion of people carrying balances month to month. The average household debt per capita varies by state, with states like Colorado having high levels at $89,170 per capita. The rising cost of living and educational expenses contribute significantly to this debt, alongside a cultural acceptance of debt for consumption and investment in assets like homes.

Conclusion

In summary, the debt situation in America across these sectors is complex, each with unique drivers and implications. The government's approach to debt management, state fiscal policies, business strategies in response to economic conditions, and consumer behaviour towards borrowing all play critical roles in shaping the broader economic landscape.

When we use the S&P 500 index as a point of reference, we are applying a broad stroke to the economy. The economy is made up of different demographics and social income brackets. For middle- and low-income families, their struggles may not be represented by the recent records seen in the stock & crypto market

Some may have limited or no exposure to the market as they struggle with necessities and the cost of living. There is a price to debt. We are borrowing money from the future to finance our present living. This is not sustainable with the current market outlook and interest rate environment.

Let us remain cautious and consider hedging as part of our strategy.

(More than half of the research above uses Grok 2 beta.)

@TigerStars

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