Warren Buffett and Charlie Munger Are Recalibrating the Berkshire Hathaway Portfolio… Shouldn’t We Be Paying Attention? 

For several years, Warren Buffett has been warning investors that there are fundamental weaknesses in the economy generally and in the banking industry in particular that concern him. Now he is moving big chunks of the Berkshire Hathaway portfolio from stocks and into presumably safer assets like cash and debt instruments.

Click here and here for two perspectives on that.

Chart of the Week: Inflation Cools Again – What’s Next? 

I’m halfway through writing an essay about the state of the US economy as I see it, including my analysis of US inflation. Reading Sean’s piece on inflation this morning, I thought it would be a good introduction to my piece, so I’m not going to say anything more here – but I am grateful to him for once again looking at popular economic and financial ideas with a contrarian perspective and then breaking down the myriad details into a few observations and insights that I can understand and agree with. – MF 

Back in April, I shared a breakdown of CPI inflation, showing why high inflation remained “sticky” in the first part of this year.

But I also made a prediction:

We should [see] prices level out a bit on their own in the months ahead. Without monetary policy intervention.

So right now, I am still thinking that the Fed might still be on track for at least one rate cut later on in 2024.

My prediction was made based on simple logic and observation. Inflation isn’t magic. It’s just a mathematical model. If you understand how the model works, you can predict what’s coming pretty easily.

But I cannot tell you how many people expressed to me that this prediction was delusional. How many people still expressed concern despite me standing next to the numbers like Vanna White, saying, “Just look!”

Well, here we are in August, and CPI inflation has fallen below 3% for the first time since 2021.

In fact, average inflation in the US over the last 10, 20, and 30 years is somewhere between 2.5% and 2.8%.

So right now, this month, we are officially in the territory of “normal inflation” for this economy.

Why has inflation calmed a bit?

As I said back in April, the high inflation rate was being caused by supply and demand problems in markets like (for example) used cars, which had knock-on effects to other industries such as auto insurance.

But we’re not out of the woods yet…

We are still seeing some areas of the economy experience really bad inflation: hospital and healthcare services; shelter, rent, and housing; and food (especially restaurants).

Because these areas of the economy are inflating too much and too fast, I’ll bet $8 we’re not going to see an emergency cut from the Fed, as some have called for.

But I also still think we’re going to see at least a few cuts in the coming months.

And it’s going to happen simply because the Fed’s monetary policies don’t have much impact on the portions of the economy that are still experiencing inflation.

What is the Fed going to do? Force hospitals to charge less? Build more apartments and plant more farms?

No. Those prices are affected more by market forces, geopolitics, and fiscal policies (i.e., Congress).

The Fed is going to cut rates because the cost of paying the public debt in the US is getting out of control. They’re also going to do it because banks are currently sitting on hundreds of billions of dollars’ worth of unrealized losses.

(Many of these banks hold massive amounts of long-term treasuries. The price of bonds goes down when interest rates go up. This is why we saw several big banks fail last year.)

So we have to ask what the big takeaway from all this is for investors.

There is a big one: Own bonds in your portfolio 10 months ago, like I recommended then.

Now? It’s getting close to too late for you to capture any meaningful total returns as rate cuts are getting “priced in” to bonds.

So make that move now to get a decent interest rate while you can.

And then prepare to sell those fixed income assets when rate cuts end – possibly a few years from now.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

Chart of the Week: More Pain Inbound? 

As Sean mentions this week, I’d been concerned that the stock market was cruising for a bruising for some time now. Between our government’s $34 trillion debt problem, the serious problems in the retail industry, the crazy price inflation in some real estate markets, and the threat of nuclear war, I thought, “How long can this last?” 

Well, it didn’t last. I’m sure you’ve been reading about the Japanese “carry trade problem” and how it eventually triggered the recent stock market drop. So, the question I have for Sean, and the one he addresses here, is: What now? How should we feel about the state of the US economy and the future of the US stock market? And what, if anything, we should do about it? – MF

Mark Ford asked me, two months ago, why the market seemed to keep going up.

I do not think anyone is asking why the market keeps going up anymore. Now, I think, people have the level of caution and concern they should have possessed months ago.

On Monday, Aug. 5, the Japanese “carry trade” began to unwind at the same time markets were processing a slew of negative economic data about the US economy.

We do not have the space here to explain the carry trade or its implications on your retirement fund. Nor would you be able to make it through the first two pages of necessary context before you fell asleep.

So in the meantime, we have to ask ourselves a simpler question: Is the market bloodbath over? Or just beginning?

We can look at historical trends for some clues:

The table above shows the number of “significantly down” days we’ve seen in the market each year since 1928. As you can see, 2024 is the third-least-volatile year in the last 30 years, with only 10 of these drops.

So far, 2024 is an anomalously good year for stocks.

You may also notice that, going back to 1970, the market cycles between these extremes.

Low-volatility years are almost inevitably followed by higher-volatility years. And vice versa.

There’s a fairly simple investing takeaway from this.

When the market has been performing hilariously badly, and it seems that the blood will not stop flowing (like in 2022, 2020, 2011, 2009, 2008, 2002, and so on)…

Put aside money to buy more stocks.

Investors with patience understand what study after study has shown: There is a nearly inverse relationship between the realized return of stocks and their expected returns.

When stocks dip? Their future returns tend to spike. When stocks soar? Their future returns become middling.

And because stocks have soared, I expect a little bit more volatility ahead in the near term.

– Sean MacIntyre

Chart of the Week: US Debt Reaches $35 Trillion 

Today, Sean provides visuals to illustrate the greatest threat (next to a nuclear war, which is also looming) to the world’s economy right now: US debt.

This is a subject I’ve referred to dozens of times in past issues, and I’ve been meaning to write about it at length because so many of my well-educated friends are unable to see it as a real and present danger. 

I’ll leave it to Sean to set the picture. – MF

While the media prattled on about Kamala calling Donald Trump “weird”…

A much weirder story got pushed to the back pages last week. One that will impact America far more than whoever becomes president in November.

I’m talking about the US national debt, which just hit a whopping $35 trillion.

Since January 2020, the debt has ballooned by 50%, mainly due to the wide gap between what the US government spends versus what it brings in.

And right now, 2024 is shaping up to be another year of high spending and low tax revenues, which puts us on track to add an estimated $1.9 trillion to the debt this year.

Now, the debt is just a number. It becomes a problem only when the US can no longer service that debt, putting the country at risk for default.

Higher credit risk can halt lending, which seizes the financial system, which cascades a long way down to you eventually saying, “Hey! Why can’t I buy bread anymore? And why is my retirement money worthless? And are those gunshots I hear?”

So the number we want to pay extra close attention to is how much it costs to service that debt, and what percentage of the US government’s revenue that is.

Here’s what we’re seeing: Interest payments on federal government debt has already surpassed $1 trillion over the last year.

As a share of federal revenues, federal interest payments are expected to rise to 20.3% by 2025, exceeding the previous high of 18.4% set in 1991.

This number, if it gets too high, is the “danger number” – the number that matters.

Because if the US is spending all of its tax revenue to service its debt, it won’t be able to spend money on anything else. That means more money printing, which means hyperinflation, which –I reiterate – is double-plus ungood.

How close are we to the danger number?

Well, think about this. Lenders often require that the ratio of debt to a person’s income should be less than about 30% to 40%.

The higher your debt-to-income ratio, the less likely it is that an institution will lend to you.

The US is probably going to hit 20% next year. The higher this ratio goes, the fewer people will want US government bonds.

And that puts everything we know, like, and cherish at greater risk.

This number is going to keep creeping higher under three conditions: (1) more deficit spending, (2) lagging tax revenue, and (3) high interest rates.

Since 2020, we’ve had the perfect storm of all three. And neither political party has proposed a meaningful fix.

It will be some years before we hit the point of no return, however. About 20 to 30 years at the current pace, by some estimates.

That means that, for now, bonds are still an attractive speculation – especially heading into interest rate decreases.

But otherwise, it might be wise to buy and hold a basket of stocks that generate revenue internationally. That can include American companies that do business overseas, like some of the stocks in the Legacy Portfolio.

But it can also include a portion of your portfolio going into emerging market funds or international stocks. (Just don’t expect them to offer the wild returns of tech stocks.)

And if you’re truly, immensely, can’t-sleep-at-night worried about the debt collapsing the whole economy? Here’s what you want: international real estate, foreign cash, and a mix of the three most precious metals in a crisis – gold, silver, and lead.

Personally, I’d mostly just stick to bonds and stocks.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

Chart of the Week: Presidential Elections and the Stock Market 

How will the election affect the stock market? As Sean points out, there is no reliable correlation, from any number of perspectives, between election results and subsequent stock market performance. One reason is that the stock market is responsive to many factors that are mostly economic rather than political. And even if a conservative, pro-business, tax-reducing candidate wins, experienced stock market pros know that any substantial legislation enacted in one term of office tends to have its impact four to seven years later. So we might see an upward bump if Trump wins – or a downward move if Harris wins. But those will be temporary. Enough, perhaps, to trade on (although the odds are so obvious, the gains won’t be great). But in my own portfolio – the one that Dominick and Sean manage – there will be no changes made as a result of what happens in November. – MF

During my recent trip to Japan, I received one question repeatedly: How will the US presidential election affect the stock market?

Now that Kamala Harris is the presumptive Democratic nominee, I want to revisit this question and offer what I hope will be received as a healthy, nonpartisan dose of “perspective.”

Take a look at this chart showing how the markets performed under every presidency for the last 60 years:

Under both Democratic and Republican presidents, the stock market generally trends up long term.

Why?

Because presidents have little to no control over the things that affect stock prices.

For example, George W. Bush’s presidency was marked by the September 11 attacks on the World Trade Center, the Enron Scandal, and the 2008 Great Financial Crisis.

The market went down, of course. As it would have regardless of party, policy, or person.

To further emphasize this point, take a look at this chart that shows the growth of a $10,000 investment if you only invested during Republican presidencies (the red line), Democratic presidencies (the blue line), or just bought and held the market the whole time (gray).

Choosing to invest in the S&P 500 only during Democratic presidencies since 1950 and sticking to cash otherwise resulted in a 5.11% annualized return. Similarly, a strategy of investing exclusively during Republican presidencies generated an even smaller 2.8% annualized return.

Though there have been several peaks and valleys along the way, the S&P 500 has grown in value over the long term regardless of who’s in office.

While elections may create some short-term uncertainty, simply “staying the course” produces the best results for investors.

Let me put this as bluntly as I can…

Through wars, recessions, inflation, onerous regulation, deregulation, high taxes, low taxes, welfare, housing crises, hyper-socialist policies, hyper-capitalist policies, liberals, conservatives, moderates…

The market has trended up.

The only guaranteed way to lose out on money is to make major investment decisions based on a president’s political party.

So don’t do it.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

Chart of the Week: Small Caps Rebound? 

I’m halfway through a piece I’m writing on what I’m calling “the state of the US economy.” I’m looking at it from the perspective of what I see happening among my friends and acquaintances – those that have small companies (with revenues of less than $500 million) and those in the real estate business as well as the luxury goods and fine art markets. The outlook, as you will see when the piece is published, is not positive. But history tells us that the ups and downs of the stock market are not always corelated to the economy, including the market for low cap stocks, as Sean explains in his column this week. – MF 

Individual stocks typically swing up and down with unpredictable caprice.

But in aggregate, when you divide them up into industries or sort them by factors, stocks do seem to obey the simple physics of a pendulum swing.

We’re seeing that right now with small cap stocks. That is, shares of smaller companies with market capitalization of between $250 million and $1 billion.

While the major stock indices like the S&P 500 and Dow recovered from the 2022 bear market, small cap stocks, like those in the Russell 2000 (the purple line in the chart above), did not.

And that’s despite the fact that, historically, small caps tend to offer better long-term returns than the market overall.

Forbes, in June, even pointed to this as evidence of “extreme divergence” in the stock market, which can be an early sign of a faltering market.

The wealth management firm Pathstone points out that small caps had “their worst first half of the year compared to the S&P 500 on record. As interest rates have remained higher for longer, earnings for smaller and less growth-oriented businesses have been more heavily impacted.”

However, we’ve finally seen this start to change with the Russell 2000’s 3-year returns finally breaking positive. Even though the rate of corporate bankruptcies has been high and rising since 2023 as the cost of debt has exploded.

This raises an important question: Why? What’s leading small cap stocks higher?

Surprisingly enough, the answer is small regional banks, which have just spiked in a big way over the last few weeks.

Small regional banks have dragged down the performance of small cap indices since (1) interest rates spiked and the yield curve inverted, (2) the failures of Silicon Valley Bank, Signature Bank, First Republic Bank, Heartland Tri-State Bank, and Citizens Bank in 2023, and (3) Fed Chairman Jerome Powell’s assertion that “There will be bank failures” caused by exposure to commercial real estate loans.

But now that interest rate decreases are increasingly likely and the yield curve is looking just slightly less inverted compared to where it was at the start of the year, the future prospects for smaller banks are looking a little brighter.

Does that mean one should rush out to buy small caps or regional bank stocks right now?

No. The time to do that was December 2023, when these stocks were still cheap, hated, and at the beginning of an uptrend. And with all the other potential problems facing small banks right now, we don’t yet know if this growth is sustainable.

But if we take this data and combine it with the recent selloff in large growth stocks, we seem to be at the beginning of a big “churn” in the markets.

Money is on the move.

And I think this is foreshadowing quite a bit of volatility in August and September.

I have my trailing stops set for some of my positions that I don’t want to hold forever. I’m also amassing a war chest of cash and bonds to take advantage of any big opportunities that come up in the coming months.

I suggest you consider doing the same. Stay safe out there.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

American Workers Have Quit Quitting, for Now 

The job-hopping frenzy of the pandemic years has given way to what some economists are calling the “big stay.” Click here. 

Home Insurance Keeps Surging 

Home insurers are pushing for big rate increases and weakened consumer protections – and states, fearful of losing their coverage, appear to be buckling.

Click here.

Another Victory for Unions 

GM sent in this article about a small coffee chain closing in Philadelphia after employees thought it might be a good idea to unionize and demand higher pay. “I’m sure they all planned on how to spend their newly won gains before, oops, the SHTF,” said GM.

Chart of the Week: Retail Declines Again 

Before I read Sean’s piece for this week’s issue, I was looking at retail numbers myself. I was wondering why the data was still largely positive when so many of my friends and acquaintances in the retail field are feeling like sales are slowing down.

At the same time, there are still more retail jobs open than are being filled. That again feels wrong to me. I don’t doubt the data, but I wonder if the scarcity of job hunters isn’t because millions of formerly employed workers are still hanging out, spending the last of the cash they received from the COVID bailouts and stimulus packages that the Biden administration enacted.

As you will see from his comments, Sean has a better grasp of this sort of data than I do. But when my personal sources are giving me the same sort of cautionary signals that Sean sees in the numbers, it leaves me wondering when the bill is going to be paid. – MF

I’m going to start calling it the “slow roll recession.”

Signs of US economic weakness keep appearing in the data. Taken individually, none of it feels particularly scary. But added up, we have a pretty strong reason to worry.

Here’s the latest thing I’ve seen that has me mildly concerned: Inflation-adjusted retail sales fell 0.9% in May and are currently about $15 billion below their April 2021 peak.

Right now, if this trend continues, we’re on track for a retail recession, with two consecutive quarters of year-over-year declines.

US recessions are labeled in gray in the chart above, and you can see how retail recessions are often a precursor to broader economic recessions.

That’s because consuming products and services makes up about 70% of US GDP. And retail sales account for nearly 40% of consumption.

Retail sales are like a canary in the coal mine. If they drop dead, you know we’re in trouble.

So should we be worried right now?

Well, if the American economy had a tachometer, the engine’s not running in the red yet – but lots of data suggests we’re somewhere in the yellow “warning” zone.

There’s another measure I’m watching closely, which is the ratio between retail inventory value and sales.

We sometimes don’t know we’re in a recession until months after a recession has begun.

But what we do know is that, when recessions occur, people stop buying stuff. Sales go down while inventory piles up.

Hence, we see big spikes in the Inventory/Sales ratio during recessions.

And we’re just not seeing that yet. Though “yet” is doing a lot of heavy lifting in that previous sentence.

So what should investors do?

Well, let me tell you this. I run stock screeners looking for value plays in the market pretty much every week. A value play in the market is simply a stock that looks like it is performing better financially than its price action would suggest.

Recently, a lot of retail stocks have been showing up on my screens. Dillard’s (DDS) for example. Dillard’s financial performance up to now has been exceptional… their price action, also exceptional… their valuation based on historical fundamentals, extremely attractive.

But what has happened tells us nothing about what will happen.

If American consumption is starting to sputter and there’s a risk that it starts to plummet as prohibitive cost inflation and high debt take their toll?

Retail stocks that don’t sell essentials are probably the last place you want to be as an investor.

So be careful out there.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

Chart of the Week: It’s Up! It’s Down! What’s Going on with Nvidia? 

Thanks to my broker Dominick’s recommendation, I was an early investor in Nvidia, and profited very handsomely from it.

From the start, there was all sorts of hype about the company, which Dominick and I discussed several times during our monthly meetings. The result was that we gradually lowered my position size by pocketing a lot of the profits and reinvesting them elsewhere.

Recently, there’s been another public conversation about Nvidia, with some pundits very bullish on it and some quite skeptical.

Last week, I sent an email to both Dominick and Sean, asking them how they see the future of the company and its share price. Their perspectives were largely similar, which gave me some comfort.

Below is what Sean had to say. – MF 

I received Mark’s message about Nvidia at the same moment – literally – that I was finishing a column comparing Nvidia’s and Broadcom’s rise in recent years to Cisco and Qualcomm in the year 2000.

Even if Nvidia has not reached the same insane, anoxic heights of Cisco’s valuation…

The parallels do provide an interesting glimpse into the nature of bubbles and the allure of stocks caught up in a wave of legitimate but extreme exuberance.

Because I do believe that, like the internet in 2000, AI and machine learning services for consumers and businesses is very much the future.

Just as early adopters of the internet created webpages that sent many designers to an early grave…

AI image generators now produce portraits of people that sometimes look like an uncanny tangle of knuckles.

But we can certainly imagine a future when AI writes or generates images that feel more… usable, and not merely a novelty.

And that’s why people are excited about Nvidia. Or, at least, Nvidia’s chip architecture and CUDA platform.

You see, Nvidia makes chips that are quite good at doing lots of linear algebra, calculus, and matrix multiplication very fast – which is all a neural net AI algorithm is, really.

This proved exceptionally useful for calculating vectors in video game graphics, and then running hashing algorithms on block data to mine cryptocurrencies, and then molecular modeling simulations, and then doing machine learning on very big datasets necessary for modern AI algorithms.

The “edge” that Nvidia’s chips possess is their ability to break complex tasks into thousands of smaller operations that can be worked on in parallel.

This is the main reason why I recommended buying Nvidia in June 2022, after it had fallen about -50% in a few months.

But with the explosion of AI, Nvidia’s prospects look nothing shy of extraordinary.

Sources say it took about 10,000 Nvidia A100 GPU processors to train OpenAI’s GPT-3 model.

Nvidia’s A100 chips cost about $10,000 each.

And that’s just one of many AI applications that Nvidia’s chips are being used for.

Do some quick multiplication, and you can see why Nvidia’s revenue and profit in recent years looks like a scythe.

But that, alone, would not justify Nvidia’s insane valuations at the moment.

For that, investors would need to see further growth. Accelerated growth. Sustainable growth.

So here’s why some investors think this growth will continue for years to come:

There are about 10,300 data centers in the world as I write this. By 2030, it’s estimated that we’ll have 2 to 4 times as many.

A medium-size data center can hold about 50 to 100 server racks, while a very large one can hold 5,000 or more.

A standard rack can hold 40 to 50 server computers.

Each server computer can hold up to 10 GPUs or more. (Really, cooling and power are the limiting factors there. So innovations might increase this number.)

Future AI models with more data and more parameters may require 30,000 training GPUs or more to train in a reasonable amount of time.

And while the A100s cost $10,000, Nvidia’s new Blackwell chips will cost $30,000 to $40,000 each.

Once you start multiplying these numbers together… we’re suddenly talking about the potential for trillions of dollars of revenue in the coming years and decades.

If you make some very charitable assumptions, find the net present value of all that future revenue, carry the one, drop some acid, and delude yourself into believing that exponential growth is a real thing…

You can start to imagine why an investor, especially an inexperienced or excessively optimistic investor, might look at Nvidia’s valuations as “fair” or “reasonable.”

So if you want to know why folks have been bidding up the price of this stock… That’s why.

Clearly, I like the stock and have recommended it before. I think they make a great product. And they have amazing future prospects.

But there are a whole host of reasons why I don’t think this will necessarily translate into a whole lot more stock price growth from here.

Let’s start with the most basic facts…

Nvidia was the top play for all these high-tech digital applications, like AI and machine learning, because it controlled a vast majority of the market share for GPUs and TPUs.

For that reason, it commanded a lot of the revenue of this market… up to this point.

But Google and Meta are working with Nvidia’s competitor, Broadcom, to develop their own AI chips in house.

Intel is rolling out its Gaudi 3 AI accelerator chip, which is both cheaper and consumes less power. AMD is launching its MI300 AI accelerator chip, which is being adopted by Meta, OpenAI, and Microsoft.

“The move signals a notable shift among tech companies seeking alternatives to Nvidia’s costly graphics processors,” a reporter for TechWire writes.

Also, there’s a huge presupposition right now that AI tools will continue to be hosted in datacenters, on the cloud. But because AI is so computationally intensive, the cost of – for example – one query in ChatGPT costs 10 times as much as a Google search.

To put that another way, each word generated on ChatGPT costs $0.0003.

So companies like Qualcomm are working on small systems-on-a-chip that have mini-versions of AI models that can fit on individual devices, handling some AI tasks without having to take on the expense of sending data to a data center.

To put it bluntly: Even if Nvidia has the most dominant chips and the largest market share, it has heavy competition on the way, and its customers actively wish to stop paying Nvidia’s prices.

So that’s one thing.

Another thing: Nvidia’s business model is (at the moment) naturally limited.

Microsoft makes money because it collects recurring revenue from Azure customers, from Windows and Office customers, from selling advertising on Bing. Its customers don’t just pay once.

But Nvidia? Only a small fraction of its revenue comes from recurring sources – its Cloud and AI Enterprise services. And these are fairly niche services.

That means that, once Nvidia sells a chip, the only way it makes more money is if it sells another chip.

And at some point in the future, nearer to now than anyone is comfortable admitting, Nvidia is going to run out of customers who want to shell out $40,000 a pop for dozens and dozens of AI server chips… and then get on the perpetual treadmill of upgrading those same chips.

As the CEO of Nvidia, Jensen Huang, once said: “Nvidia is a one trick pony.”

All the companies that approached and breached a trillion-dollar market cap? Apple, Microsoft, Amazon, Google, Meta? They all have more than one trick.

And this might be why, the week that Nvidia’s market cap blew past Microsoft’s to the number one position, just about every single Nvidia executive cashed in on the stock.

The CEO’s stock sales were practically perfectly timed with Nvidia’s recent high.

Not to put too fine a point on it…

I think that Nvidia is worth holding. But I do not think, at these valuations, that it should be any more than 1% to 3% of anyone’s portfolio.

So if you want to initiate a position? Throw a small amount in and prepare to hang on for what will inevitably be a wild ride.

If you have seen tremendous appreciation already and it’s now a significant proportion of your portfolio?

I would take a lesson from Nvidia’s executive team and trim your holdings.

When I ran a DCF analysis of Nvidia’s free cash flow and compared it to its peers in the semiconductor industry…

I can see the stock growing to $140 to $180 by 2030. That gives the company about 20% to 50% more upside over the coming years.

And that’s even if the company manages to maintain the skin-sloughing rapidity of its profit growth for the next 5 years, which it… won’t.

I’m not even going to hedge that claim. Nvidia will not be able to maintain the growth trajectory it’s on.

For anyone who thinks otherwise: I have some tulips to sell you.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

Americans Are Still Losing Money on Their Money 

As the Fed raised interest rates over the past two years, the returns on bonds and other debt instruments have increased substantially. While I’ve seen so many investment options become more expensive and/or more risky, the lure of getting 4.5% to 5.5% guaranteed is getting stronger. Such ROIs are still only a point or two above inflation, but it’s still a lot better than what I was getting previously – which in some cases was less than one-half of one percent.

That, by the way, is what you can expect from a bank savings account these days. One-half of one percent. Who would want to see the real value of their savings depreciate every year?

A whole lot of people, apparently. According to the WSJ, commercial banks are currently holding about $17.5 trillion in their vaults (on their ledgers). That is a whole lotta money sitting there and losing money. Click here.

I wrote the above before I saw Sean’s column this week. His thoughts and his data will give you the bigger picture. – MF

Chart of the Week: The Effect of Interest Rate Expenses

This week’s chart comes by way of The Kobeissi Letter, which had this to say:

For the first time in history, annual interest payments on US national debt will overtake defense spending in 2024, according to the CBO.

It is projected that for the full Fiscal Year 2024 (FY 2024), interest spending will hit $900 BILLION.

In Q1 2024, interest costs hit $1 trillion on an annualized basis and were $29 billion higher than defense outlays.

In the first 7 months of FY 2024, interest was also higher than spending on Medicaid, Medicare, and Defense, at $514 billion.

Meanwhile, in 2023, interest as % of GDP was the highest in 25 years and even exceeded World War II levels.

The US government needs lower interest rates more than ever.

As bad as $900 billion spent on debt servicing sounds, the US is projected to spend $6.5 trillion and bring in $4.9 trillion in 2024.

To make an analogy: Lenders typically look for a debt expenses-to-income ratio of 36% or lower. $900 billion is 18.3% of the US’s projected revenue. So we’re about halfway to the point where a theoretical lender would deny the US a loan on that basis.

But, importantly, debt servicing is economically stimulative. So is deficit spending. Government tax revenue would not remain flat if both persist. We’d see growth.

The whole thing is a calculus problem. Fortunately, someone else already did the math.

As I related in my column in the May 1 issue, we have about 20 years, probably less, before the US public debt spirals out of control. And that’s if the crazy monetary and fiscal policies we have persist.

But that likelihood will diminish if any combination of four things happens: Lower interest rates, lower government spending, steadily higher inflation, and higher taxes.

Of those four, we’re likely to see lower interest rates the soonest, though certainly not as low as we’ve come to expect since 2008.

The Swiss central bank recently lowered rates. As did the European Central Bank and the Bank of Canada.

Now that headline unemployment in the US is creeping up above 4%, we’re starting to see some shakiness in the job market.

And now that Target, Walgreens, Walmart, and Amazon are lowering prices, we’re going to see inflation start to level out. Rates were raised to combat high inflation. Now that deflation is happening in some sectors of the economy, there’s less of a need to hold high interest rates in the first place.

I stand by what I’ve said in the past: We’re probably going to see some rate cuts in late 2024, and we’re definitely going to see some in 2025.

This will be good for bonds and bond funds. It might also be good for profitable dividend-paying companies and utilities. And it will probably be bad for growth stocks in the short term, but beneficial long term.

Allocate accordingly.

– Sean MacIntyre

Check out Sean’s YouTube channel here.