Weekly Market Update by Retirement Lifestyle Advocates
More on US Government Debt and Interest Costs
Last week, I noted that US Government debt crossed the $36 trillion thresh hold. The obvious problem with rapidly increasing debt at the federal level combined with higher interest rates is that the point in time when a ‘debt reset’ occurs gets ever closer.
This past week, commentator Wolf Richter noted that interest costs now consume 37.8% of tax receipts as of the third quarter of this calendar year. (Source: https://wolfstreet.com/2024/11/29/federal-government-fiscal-mess-q3-2024-interest-payments-to-tax-receipts-ratio-spikes-debt-to-gdp-ratio-worsens-further/)
The last time interest costs were at that level was in 1996, but at that time, they were in a downtrend from the high-interest era of the 1980s.
Now, however, interest costs are moving up and moving higher rapidly. The chart on this page from Richter’s piece (check out his entire article by following the link above) illustrates just how quickly interest costs are escalating.
Notice the chart pattern on the extreme right side of the chart. From calendar year 2022 to the present, the chart pattern is almost straight up, otherwise known as a parabolic chart pattern.
Of course, there are two primary differences between the present time and 1996, the last time interest payments on the debt consumed this level of tax revenues.
The first difference, as noted above, was that in 1996, interest costs as a percentage of tax revenues were declining. The economy was recovering from a recession in the early 1990s. Today, interest costs as a percentage of tax revenues are increasing.
The second and very important difference between the present time and 1996 is the level of debt that exists as a percentage of economic output. In 1996, the national debt was 5.225 trillion, or 64% of US economic output. (Source: https://www.thebalancemoney.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287)
Presently, the national debt is just over $36 trillion, which is about 125% of economic output. (Source: https://www.usdebtclock.org/)
Distress in Commercial Real Estate Bonds Reaches All-Time High
The CRE-CLO bond market is showing greater signs of distress. CRE-CLO is an acronym that stands for Commercial Real Estate Collateralized Loan Obligation. Essentially, these are securities purchased by investors that are variable-rate loans tied to commercial real estate. On a very basic level, they are bridge loans for commercial real estate.
Most of the current batch of loans originated between 2020 and 2022, prior to the Fed’s recent interest rate hiking cycle. At the time these loans with three-to-five-year maturities were issued, benchmark interest rates were near zero. Obviously, interest rates on these loans are now much higher. To give you an example, the floating rate of interest charged on these bridge loans is often 3.5% more than the SOFR (Secured Overnight Financing Rate). The SOFR was 0% when these loans were originated resulting in an interest rate on the loan of about 3.5%. Now, the SOFR is at 4.9%, which translates to an interest rate of 8.4% on the loan. To make matters worse, many of these loans made on commercial real estate required 100% of the cash flow from the real estate to make the loan payments. With the current higher interest rates, many of these loans no longer cash flow; hence, the distress.
Presently, more than $300 billion of these loans are distressed or likely to become distressed. (Source: https://mises.org/mises-wire/distress-commercial-real-estate-bonds-hits-all-time-high)
Out-of-the-Box Inflation Hedges
Looking for unique inflation hedges? Here are three to consider.
1.) High-quality firearms. (You can show this to your significant other and explain you’re looking out for your financial future.). (You’re welcome). High-quality firearms, properly maintained, tend to keep pace with inflation. Consider this ad from 1956.
The firearm displayed in this ad would today be worth about $4,000.
2.) Farmland. Since the price of farmland tends to track the price of agricultural commodities, farmland can be an effective inflation hedge.
3.) A fixed-interest mortgage locked in at a low interest rate. If you’re sitting on a fixed-interest mortgage with an interest rate in the 2-4% range, you own a decent inflation hedge, provided you can comfortably make the payments on the loan. There are few times historically that keeping debt has made sense in my view, but now may be one of those times.
Crypto-Billionaire Pays $6.2 Million for a Banana Taped to the Wall in the Name of Art
In what has to be the nuttiest story I read this past week, crypto-billionaire Justin Sun shelled out a cool $6.2 billion for a banana taped to the wall with duct tape.
Sun outbid six other interested parties for the ‘art’ dubbed “Comedian” by the ‘artist,’ an Italian named Maurizio Cattelan. I swear, I am not making this up. After making the purchase, Sun declared, “This is not just a piece of art; it represents a cultural phenomenon that bridges the worlds of art, memes, and the cryptocurrency community.”
Then, Sun ate the banana. (Source: https://www.cnbc.com/2024/11/21/crypto-investor-justin-sun-banana-comedian-sotheby-auction.html)
This week’s RLA radio program features an interview that I did with cryptocurrency expert Mark Jeftovic. You can listen to the program now by clicking on the "Podcast" tab at the top of this page.
“My wife and I have a perfect understanding; I don’t try to run her life, and I don’t try to run mine.”
-Milton Berle
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