The Next President Will Have a $36 Trillion Problem on Their Hands
Eventually, investors will have to acknowledge the ramifications from a massive and growing national debt load.
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It is hard to believe we have closed out October, had Halloween and are already in the closing two months of 2024. Where does the time go?
By this time next week, investors will know the election results and can start to factor in any potential policy impact changes on the economy and the markets. Or, I sincerely hope that election results are known and accepted by next Friday.
Regardless of who ends up in the White House and what the congressional makeup will be in January of next year, the 800-pound gorilla in the room will be there for the next administration to begin to address or continue to ignore. I am talking about the U.S. federal debt that is rapidly approaching $36 trillion and continuing to rise at an alarming clip. This growing issue has been avoided by most investors and financial pundits for way too long, given its growing danger. James Carville’s "bond vigilantes" have been dormant longer than Rip Van Winkle at this point, but there are some signs that may be about to change.
Gold continues to surge and has risen just over $700 an ounce since the beginning of the year as many central banks add the yellow metal to their holdings. Not ours, of course. The yield on the 10-year treasury has unexpectedly moved from just over 3.6% at the time of the 50 BPS cut to the fed funds rate at the FOMC meeting in mid-September to nearly 4.3% as of the close of Thursday. The federal government spent $882 billion in interest expense to service the national debt in its recently closed fiscal year. And that was with an average interest rate of 3.06%. While that was a 28-year high, one can easily ponder the ramifications if the average rate moved up to the current levels of 10-year treasuries.
The bond market appears to be increasingly worried both about the federal debt and the possibility that the Federal Reserve may have raised the "mission accomplished" flag on the inflation front a bit too soon. The rise in yields has pushed average mortgage rates to their highest levels since August and approaching 7%.
The housing sector, not unexpectedly, is in a state of flux and paralysis as mortgage rates probably need to get to the 6% level if not sub-5.5% to significantly boost housing activity, given the historically low housing affordability rate. Rising rates are boosting the "unrealized losses" on banks bond portfolios once again. This is what helped trigger the demise of Silicon Valley Bank and two other significant regional banks in the first half of 2023. Banks also now have to deal with rising delinquency and default rates on commercial real estate within their loan books.
Rising interest rates are hardly just a U.S. phenomenon in recent weeks. U.K. 10-year gilt prices have moved nearly 75 BPS higher since the cut to the fed funds rate. They now hover just under 4.5%. Evidently, the market is not buying the new government’s attempt to dress up additional "debt" as "investment" in their recently submitted budget. And the United Kingdom doesn't have the luxury of having the global reserve currency.
While growing and unsustainable governmental debt has certainly not been anywhere near top of mind during the market's rally throughout 2024, it should be on any list of major concerns moving forward. That is something I think will be much more relevant for both the economy and markets in the months ahead, regardless of who occupies the White House come January.
At the time of publication, Jensen had no positions in any securities mentioned.
