VTI - On Growing Federal Debt And Potential For Nuclear War

2023-10-11 14:44:47 ET

Summary

• Noted investor Paul Tudor Jones was on CNBC this week and is predicting a bleak future for the economy and stocks heading into 2024.
• The famed billionaire money manager highlighted two major concerns he has on the current market. The first was around the fast-rising national debt.
• The second was due to the emerging conflict in Israel, something that he can't take nuclear war off the table around as escalation potential is unknown at the moment.
• We dive into both issues and their potential impacts on investors in the paragraphs below.

An eye for an eye will only make the whole world blind .” ? Mahatma Gandhi.

Famed money manager Paul Tudor Jones appeared on CNBC on Tuesday. The well-known billionaire investor, who first made his bones predicting and profiting from the October 1987 crash, had some particularly dire takes on the new conflict in Israel, the escalating national debt and his outlook for stocks heading into 2024.

I agree with Mr. Jones that investors should be much more concerned about the exploding national debt than they appear to be at the moment. In addition, his take on the new conflict and its potential to escalate sharply just adds to the myriad major geopolitical events investors have to keep a wary eye on right now. We discuss both topics below.

Mr. Jones stated " it’s extremely tough to be an investor in risk assets" right now for a couple of key reasons. The first is that higher interest rates make servicing debt, much more onerous. He specifically called out Federal government debt service, noting " the United States is probably in its weakest fiscal position since certainly World War II with debt-to-GDP at 122%."

This concern is one I share and is no stranger to my Seeking Alpha followers, as I have highlighted this topic many times over the past few months. Our nation's debt situation gets way too little focus from our media as well in my opinion.

The situation seems to be getting worse and not better on this front recently. The federal government deficit for FY2023 that ended on September 30th, is now projected to come in at around $1.7 trillion. And this when the country is seeing two percent GDP growth so far in 2023!

In addition, the national debt has risen some $2 trillion just in the four months since the last debt ceiling raise! The federal governmental debt increased some $500 billion just from September 15th to October 5th, it should also be noted.

The cost to service the burgeoning national debt will continue to increase at current yields in the quarters and years ahead. All one has to do is basic math. The current blended interest rate on the just over $33 trillion in national debt is just over 2.9%. The current yield on the Ten-Year Treasury is currently around 4.6%. Some 30% of the national debt will roll over and need to be refinanced over the 12 months and just over half will need to do the same over the next three years.

As I stated in my recent article, " Something Will Break Soon ," this is simply untenable on a longer-term basis. I believe the Federal Reserve's only option is to continue to increase rates until the economy goes into recession. This will bring interest rates down significantly as inflation finally gets squelched and will lower the costs to service the national debt. This is also something Mr. Jones pointed out during his interview on CNBC:

"As interest costs go up in the United States, you get in this vicious circle, where higher interest rates cause higher funding costs, cause higher debt issuance, which cause further bond liquidation, which cause higher rates, which put us in an untenable fiscal position ."

In addition, even though the Fed Funds rate has been taken up by over 500bps since March of 2022, inflation is still not near to the central bank's official two percent target. We saw more evidence of this Wednesday morning when the September PPI report came in much hotter than expected. Thursday morning, the September CPI reading will post before the opening bell as well.

The other disconcerting thing the well-known fund manager said was he

" would personally wait for a resolution and evaluate the potential impact of the Israel-Hamas conflict before he jumps into risk assets again. He also hasn’t ruled out the possibility of a nuclear war ."

I put the chances of this new conflict escalating to this point at extremely low, but not out of the realm of possibilities. Israel possesses tactical nukes and if Iran is drawn into an expanding conflict, that country has the capabilities to build " dirty bombs " and the hypersonic missiles to deliver those payloads.

We also have a proxy war still going on in Ukraine with Russia, the country with the largest nuclear arsenal in the world, that has now gone on for more than for a year and a half. The biggest land war in Europe since WWII has already resulted in hundreds of thousands of casualties on both sides. While the conflict seems to have devolved into a bloody stalemate, there is no telling how events on the ground will go in the coming months and quarters.

Then, there is always the potential of China invading Taiwan, a concern that has been lingering for more than a year now. In short, there are more potential major geopolitical events than usual within the current environment for investors to worry about.

This is on top of concerns about a deteriorating American consumer , a potential commercial real debacle in 2024, the continuing struggle against inflation as well as the Leading Economic Indicators declining for 17 straight months now. Something that hasn't occur since 2007/02008, right before the Great Financial Crisis.

Despite all these risks, investors are being paid very little premium to hold stocks right now at current trading levels compared to " risk free" instruments. This is why 50% of my portfolio is in short-term Treasuries yielding 5.5% currently. I also have approximately three percent of my portfolio in long dated, out of the money bear put spreads against the SPDR® S&P 500 ETF Trust ( SPY ) . These instruments will pay off massively should the S&P have a 20% decline from peak to trough over the next 9-12 months. I view this as cheap "portfolio insurance" against the remaining long positions I hold.

This type of decline would be extremely likely should the country go into a recession which I have forecast for 2024, of if any of geopolitical events outlined in the paragraphs above come to fruition.

I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones ." - Albert Einstein.

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