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Dear Old Friend,
Luzern, Switzerland, is a fascinating place.
But not as fascinating as the mathematics behind American debt ceiling accounting.
You’re waking up this morning to the Senate passing a debt ceiling deal with few voices standing up to the absurdities of it all.
We plan to add another $4 trillion in new debt by 2025, and the debt ceiling is suspended past the next election. The incentives to spend into oblivion before the election are massive. The government might spend enough money to prevent an official recession, but D.C. again ignored voters’ demands for spending cuts. The money printer is back, while productive parts of the economy are shattered.
Sure, the U.S. avoided default – but another problem looms that could fuel more debt and higher service costs. The nation must refinance about half its debt within 30 months. Less than two-year duration bonds comprise about 43% of all U.S.debt, according to Incrementum.
The Treasury will do so after over a decade of roughly 0% interest rates while the Fed is hiking interest rates (with maybe 6% to 7% as an endgame.) The government doesn’t want to pay the principal back… because it can’t afford to pay it back. So, it will refinance at higher rates.
It's also fair to ask: How much new money – from new financing – will be used to pay off costs associated with servicing the interest on the existing debt? By definition – new debt to pay off interest from previous debt is called Ponzi finance.
But, Wait! It Gets Worse!
Who will own new U.S. debt in the future? We can’t rely on
China, Japan, or the Federal Reserve. The U.S. public will own it. And it gets worse when you dig into how debt operates. Look at the chart. When I’m 70, public-held debt will represent 200% of the nation’s GDP.
Let’s put this into real terms. For every unit of productivity in the future economy, we will see two units of debt.
This reduces incentives to work, misallocates resources, and drives a spike through the real (productive) parts of the economy. This is Argentina style mismanagement.
Let’s put this into other terms: The people who oversee our economy are raiding the treasury before the bottom falls out.
It’s been going on for years… and we’re redefining the word “terminal” in the term “terminal velocity.” I’m so very glad that we put America’s best and brightest in charge of our debt.
Government Incompetence in One Chart
So, remember all those claims that we had to raise interest rates because wages were zooming higher? Yeah, that was untrue.
The revisions to the Q4 wage figures have been downwardly revised at a level that screams “government lies.”
Nonfarm real hourly compensation was revised down from 0.7% increases… to NEGATIVE -4.7%. It gets worse in durable goods manufacturing…
“The economy is strong as hell, man….” Supposedly, our best Ph.Ds. are working on this data each month. So, the government is either lying to us about wage growth (which everyone knew was false) or they are incompetent.
If you were a building constructor, and your measurements were this off from your floor plan… the building would collapse, and you’d still be in prison (a nod to an old Lewis Black joke).
Recapping the Trade of Thursday…
Yesterday, I “Zoom-bombed” Olivia Voz’s show to tell people about a simple trade idea that could lead to about a 70% gain overnight. We bought the SPDR Energy Select ETF (XLE) $77 call that expires today and sold the $78 call for today.
All we need is for the XLE to stay above $77.60 today to make money. The argument was that short sellers in the oil markets would cover some positions ahead of Sunday’s OPEC meeting.
In premarket, the XLE is up 1.5% to the $78.50 level. Anyone reading this who took that position should close the position early and take the easy win. Don’t wait… take the money… then come join the greatest trading community on Earth - Flashpoint Elite.
On Tap This Weekend
- I’ll introduce you to the top algorithmic investing strategy for long-term success (there’s academic evidence to prove it).
- We’ll talk about the jobs report from this morning.
- I’ll dig into the state of momentum in the market… and eye the June 16 Quad Witching (options expiration event).
- We’ll set our compass for next week’s earnings and major economic data reports.
See you out there,
Florida Republic Capital (Available on Substack)
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.