The Looming Debt/FED Rate Standoff

Good morning!

As we continue to watch bond yields rise and a hawkish FED continues its’ higher for longer policy, we are starting to see a concerning problem emerge for the National Debt.. you know, the number that we reach then extend with no backlash year in and year out.

It is no secret that the US Government is loose with your tax dollars, regardless of who is in charge. And it’s especially easy to borrow and spend at near 0 rates (consumers seem to have picked up this habit as well). However, time has come to pay the piper.

As old bills, notes, and bonds come due, the government is forced to either pay back the loan and take the hit or to sell new bonds and kick the can down the road. We all know which one of these 2 options they’ll choose. However, selling these new bonds will explode the national debt, since interest rates will be several times higher than that of previous cycles.

The Viscous Cycle Continues

The government only has a couple ways out of this problem:

1. They can massively cut spending on entitlements, which currently make up 48% of the national budget. This seems unlikely, as politicians avoid even mentioning cutting social security or Medicare because it’s career suicide.

2. Cut the interest rate and inflate the dollar. Letting inflation win is a great way to reduce the impact of old debt, especially when the dollar has exploded higher in value, relative to other currencies (this is a whole story on its own). Other countries are losing money hand over fist in terms of relative value, to the point where the New York Federal Reserve put out an unprompted notice that they definitely did NOT intervene in Foreign Exchange (FX) markets.

The FED will eventually drop rates

When you factor in the struggling overall economy, and a the aforementioned debt time bomb, I am convinced that the FED will drop rates. If nothing else, to allow their friends in DC to continue their spending spree. As a reminder, the current Fed Funds rate of 5.33% is still BELOW the long term average. The biggest question is will it matter or has too much damage already been done?

Gold Seems Good

On a final thought, I am extremely bullish on gold (disclosure – I hold calls on GDXJ). With Geopolitical tensions high across the globe, Core Inflation remaining high, and a yield curve pointing at recession, holding gold and gold mining stocks seems like a no brainer.

That’s all for now, have a great week!

Ryan