Column #431 October 1, 2023
The primary stock market indexes peaked two years ago. Since then we’ve had some crushing declines in the more vulnerable hot stocks followed by rebounds that motivated talk of a new bull market. But each time, investors started feeling good again, the raging optimists saw their predictions fail.
The odds of a major stock market debacle have not diminished in the past two years. If anything the odds are much, much greater. The reason is debt. Debts for nearly everyone have soared in the past two years—especially for the Federal government.1
As can be seen, in the past 61 days the debt increased $680 billion which is at a rate $11.15 billion per day. The average interest rate on the debt was 2.97% for fiscal year 2023, which means the interest expense is now at least $1.005 trillion per year. Medicare/medicaid costs are $1.481T, Social Security costs are 1.376T, and Defense/War costs $0.830T for a total of $3.687T. Add in the interest expense of $1.005T and those four fixed expenses cost $4.692T. With total revenues coming in at only $4.412T, one can see that our Federal government is bankrupt. That’s because 100% of the money needed to run the many agencies, foreign aid programs, and the administration has to be borrowed.2 3
Corporations and consumers are also under pressure from too much debt. To expect that we will all breeze through the next few years with the same spending trajectory is a bridge too far. This isn’t something that is temporary. Long-term government bonds are paying more than 4.5% now and the short-term treasuries are up around 5.5%. Predications are that increases in interest rates aren’t over yet. If so, money will only get tighter which will be a drag on the economy.
What I find really disgusting is that Congress is the branch of government that sanctioned the spending during the past 20 years to get totally out of hand. Our elected representatives have shown no restraint as they have buried the government under trillions of debt. In fact, debt is on course for a $4.121T deficit this fiscal year and this is with a so-called “conservative” Congress. Is this going according to a secret scheme for America's transformation to a centrally-planned, government driven economy?
That’s the backdrop. We’re a country that has spent money like drunken sailors and is still spending it like there’s no tomorrow. The emotional high the spending generates will end in a crushing depression that will plunge stock market values back down to more normal levels. In some cases that will mean price drops of 80% and even more!
The recent pop to the upside in stock prices since October 27, 2023, has generated more bullish talk than the prior peak set on July 27, 2023. But instead of that being good news, it’s a sure sign of complacency. The risks of overvaluations and too much debt are being ignored. Stocks can be great buys when they reflect historically good values and consumers aren’t tapped out. But that’s not the case today. The Buffett Indicator is a simple measure of value and it’s way too high. Another measure of value is the Shiller Price to Earnings Ratio and it too is way above historical lows and even historical norms.4 5
Below is a momentum chart courtesy of Elliott Wave Theory. It shows intermediate-term cycles and setups for market setbacks. It’s quite clear that the rally from October 27, 2023, is very long in the tooth and the downtrend is ready to resume with gusto.6
The odds of a credit contraction are very high. During credit contractions assets are sold to improve the liquidity of balance sheets both personal and business. Dollars are preferred during those times because so many debts are denominated in dollars. Therefore, we can expect to see asset prices of all kinds to fall versus the dollar while a credit contraction persists.
While interest rates are still rising, the safest investments are shorter term bonds (less than one year) that you rollover on renewal. Another option is to simply purchase “I Bonds.” I Bonds are long-term bonds that change their interest rate every six months. When interest rates have peaked, purchasing long-dated Treasury bonds become the best bet.7
For aggressive investors there are good opportunities in shorting the market. Unfortunately, shorting the market is not suitable for all investors so we’ll not dwell on that for now. But a good, high-risk shorting play is Direxion Daily Small Cap Bear 3x Shares (TZA).8
To your health.
Ted Slanker has been reporting on the fundamentals of nutritional research in publications, television and radio appearances, and at conferences since 1999. He condenses complex studies into the basics required for health and well-being. His eBook, The Real Diet of Man, is available online.
For additional reading:
1. US National Debt by Year by Kimberly Amadeo from The Balance
2. Debt Clock
3. Interest Payments on the Nation’s Debt Are Soaring, Adding Pressure to Congress’ Spending Battle by Tami Luhby from CNN
4. The Buffett Indicator from Current Market Valuation
7. I Bonds from Treasury Direct
8. Direxion Daily Small Cap Bear 3x Shares from MarketWatch