Latest from Brien Lundin

Debt Soars Into Uncharted Territory

The U.S. federal debt has grown so large that it now makes the once-implausible idea of default seem not only possible but likely.

This will have dramatic implications for every investor, anywhere in the world.

A Guest Editorial
By Chris Weber

Editor’s Note: As we busily prepare for this year’s New Orleans Conference, beginning in just a couple of days, I am very pleased to present a guest submission by my great friend Chris Weber.

Chris is perhaps the most instinctive and successful investor I’ve ever met, with an amazing track record of picking cycle extremes in every major asset class. His thoughts — clear, concise and founded on common sense — make something as difficult as investing seem simple.

After reading Chris’ recent thoughts on the exploding U.S. debt situation, I asked him to share his views with our readers. I’m confident you’ll find them as valuable as I have.

— B.L.

Dear Fellow Investor,

U.S. politicians used to be worried about the federal debt. Apparently these “deficit hawks” are now extinct.

The last time they seemed to have influence was during the two U.S. Democrat terms of Jimmy Carter and Bill Clinton. Both left office with the debt on the decline.

Obama clearly did not listen to any deficit hawks. But in this, he was only following in the footsteps of recent Republican presidents: Nixon, Reagan, and both Bushes all saw the deficits soar under their watch. And as I said, the species of the deficit hawk seems well-nigh extinct today.

What is especially unusual is with a strong economy we are seeing huge borrowing and deficits which will top $1 trillion this year. And this is with interest rates still extremely low by historical terms. It’s hard to believe that interest rates have anywhere to go but up.

The way things are going the servicing of this debt — paying interest to those who lend the government the money — will start to be greater than the amount of money spent on the U.S. military each year. There will be less left for the things people want government for, from fixing roads to providing health insurance for the poor.

It is estimated that by 2020, only two years away, the U.S. government will spend more on debt servicing than it does on children. That means not just education, but food stamps and general aid to poorer families.

You have to wonder at what point people will begin to scream. To be sure, all looks good now. The economy is humming along with a low jobless rate and stock prices near record highs. But it used to be, not all that long ago, that governments took advantage of good economies to prepare for times when things stop going well. That’s not happening now.

They are acting as if bad times will never come again. But of course they will. And when they do, there will be much less room to maneuver than ever before.

The Fed can drop its rates only so far, and with them at 2.25% now — with the U.S. president unhappy about that — there seems to be no plan in case something goes wrong. And with a stock market now the longest bull market it has ever been, chances increase all the time that things will change. Even I, who remain relatively bullish, cannot believe that they can only go up.

Looking down the road, what I think will happen is that the gigantic debts will be wiped away. Perhaps a “debt holiday” of some sort. If the global economy goes south — and this great increase in debt is a global phenomenon — there will be screams from ever more people to stop paying the rich people who own the debts.

And yet I see no talk about this possibility. We are in uncharted financial territory, with borrowing soaring amidst good times. What will happen when bad ones come? I think I better start studying up on “debt Jubilees.”

From this article comes this, which I didn’t realize:

“Debt jubilees were designed to make such losses of liberty only temporary. The Mosaic injunction (Leviticus 25), ‘Proclaim liberty throughout the land,’ is inscribed on America’s Liberty Bell. That is a translation of Hebrew deror, the debt Jubilee, cognate to Akkadian andurarum. The liberty in question originally was from debt peonage.”

Instead of something not to be even talked about, I think debt cancellations are going to happen. The only question is how and when. Because as I see things, we are going to witness a level of debt peonage that approaches Biblical proportions.

Again, we’re seeing huge borrowing at a time of generally good economies. It used to be that those sorts of times were made to prepare for bad times. I can’t stress this enough that when bad times come again, there will far fewer things that can be done. The easiest solution involves cheap money: so cheap that we call it today “helicopter money.” It has been a long time since protection of the value of the currency ranked high amongst government officials, unless those governments were in dire trouble.

And even then...for instance, recently the Argentine finance minister was fired for spending too much of the nation’s reserves of gold and strong foreign currencies in order to prop up the falling currency. Such moves for strong currencies are simply not politically popular.

But if you think those sorts of moves are not politically popular, just wait for another sharp global recession. We started out 2008 with interest rates in the 6%-8% range. Thus, putting them down to zero was dramatic, along with huge increases in central bank inflation. But what happens if things fall from here?

There are a few recent cases of nations going bankrupt and what they did. A few years ago Cyprus effectively confiscated people’s savings above a certain amount. All that seemed to do was to punish savers.

I don’t pretend to know what is going to happen, or how, or when, but when I see this global debt piling up — and during good times, too — I look at the future with great trepidation (as the puffed-up politicians used to say).

Simply put, it’s now beyond question that the level of global debt has become unsustainable.

So the fundamentals, as sad as they are, portend a bullish market for at least one area. And the technicals seem to have just now turned a corner. Being down so long, it can’t be a surprise that precious metals are perking up again. And that seems to have happened since the lows of September 11.

Yes, it is too early to be entirely certain of this last move. But I do think we have turned the corner.

And before you get too pessimistic, some way or another the world continued with all those earlier debt holidays. They in fact cleared the way for greater and more sustainable prosperity — based not on debt, but on real work.

Golden Opportunities continues below...

So Will Debt Renunciation Be A Good Thing?

Not so much either good or bad, as inevitable. But if you push me, then I say more good than bad.

Debt levels will be — or already are — so high that I don’t think anyone actually believes they’ll be paid off. Some readers have pointed out that debt will be inflated away, and I don’t deny this. In fact, it is one of those rare things you are pretty much certain will happen. But at this point, inflating away the debt pretty much equals the destruction of the currency. This could happen as well. I’m not saying it won’t.

But for generations crushed under debts taken on generations before they were born, there will be a rising tide of people wondering why they should have to pay so much of what they earn to service these debts. Especially since they’ll see so much of overall government spending going to paying money to bondholders and less money going to the things they want.

And let’s face it: Not just today, but in all times, the debt is owned by the rich people. This was at the heart of Thomas Jefferson’s belief that a national debt is evil. It takes money from the poor and gives it to the rich, with the government as the mechanism for the transfer. As long as the debt was within bounds, you didn’t see this happen so clearly. But from here on out you will.

Debt renunciation is a way to get rid of the debt without destroying the currency. I’m not saying currency destruction won’t happen also. These two statements can stand side by side without the one negating the other.

And do I have to remind you that governments are spending so much on servicing their debts now — that is, paying the interest on their debts — even with interest rates at historic lows?

Can you imagine what will happen when interest rates rise? And at some point, if debt renunciation starts being talked of, and politicians in favor of it winning elections, those who own the debt will start to dump it, and thus drive up interest rates even more.

We could well have a flip side to the events of the last few years which have seen interest rates far lower than they should have been, and instead see a world where interest rates become higher than they “should be,” simply out of bond-holder fear of debt renunciation.

Of the two methods, currency destruction by inflation and debt renunciation, I personally see the first as far more immoral than the second. In fact, I’m not even sure renunciation of government debt contracted generations ago is wrong. It was wrong to borrow as governments did, and wrong to extract money from people to pay the interest on that debt to the wealthy who lived off it.

And I say this as one of the lucky ones who was able to sail through life in the 1980s and 1990s simply because I was lucky enough to buy government bonds in the early 1980s, with 30-year maturities. On some level, I knew what I was doing was wrong. I knew that I was taking money from those poorer than I was, or rather that the government was paying me from those poorer.

But that’s the way government debt works. And the destruction of the middle classes in the U.S. stems in no small part from the massive debts incurred starting in the 1980s.

And yet, as the system stood, interest rates were being offered well above 10% per year, paid twice per year, only because I bought bonds when few people thought they were a good deal. In the early ’80s, with long yields at 15%, the market was full of people who told anyone who listened that bonds were “instruments of guaranteed confiscation.”

But it is part of human nature to satisfy your wants with the least possible exertion. Condemn that as you wish, but I think the statement is simple and true. And for me, switching out of gold and silver and into Treasuries was the best way, starting in 1980, to do just that.

I tried to tell people how good a deal this was. I even had a newsletter based on just that message. I felt so strongly about it that I voluntarily subsidized that newsletter out of my own pocket.

I gave it a few years, but when it became clear that not enough people agreed with me, I shut it down. Instead, I lived a good life — or continued to — and continued to have it subsidized by the interest of the bonds I had bought a few years before. The only switch was to change the currency of those debt instruments in early 1985, when it became clear that the U.S. dollar’s bull market, which had begun in November of 1978, was over in March of 1985.

I say all this because I knew that on one level owning government bonds was wrong: I was taking money from people who were working each day to subsidize my life of leisure. But it was the easiest way I knew of having a good life without working.

And the various governments of the world were effectively patting me on the back because I lent them money. I clearly thought it was more wrong than they did.

But those days are over now. So important were they to me that I even marked that day in July of 2016 when I knew the bond bull market was over (and wrote about it soon afterwards). The average interest rate level we see today, we’ll probably never see again. Or if we do, it will be under a very different monetary system: a more realistic one that I hope emerges in the future.

The easiest way of transitioning to that system is to renounce the debt and once again tie the currency to gold or silver. I hope it doesn’t get messier than that, though I fear it will.

How To Prepare...

There are steps people can take in preparation for what is coming.

First is to not buy bonds. The old argument that they are instruments of confiscation is true now for the first time since 1980. If you buy bonds, as interest rates rise your bond price will fall. We’ve started to see this happen since July of 2016. Every day when you see the 10- or 30-year yield rise means that the prices of those instruments has fallen.

Run fast from any advisor who tells you to have a certain percentage of your money in bonds. Please take it from me: That way no longer works.

The second way is to actually profit from the new trend. There are ETFs which enable you to short bonds. The one with the symbol TBF is the easiest one to buy. Every investor — actually every person with any money — should own this with at least 10% of their money. Buy it, put it away and forget about it. Don’t watch it every day. But it will grow in value as interest rates rise. If you want to leverage this move you can either buy TTT or borrow money and buy more of TBF.

TTT does the leveraging for you, but the unseen borrowing costs can hurt you unless bonds are moving consistently along their trends of decline. If they are consolidating their prior moves, like we saw through 2017, then TTT will decline in price and possibly sharply. From the start of the bond bear market in July of 2016, the next six months were tremendous. But then over that next year of 2017, the consolidation took TTT down sharply.

Over time, interest rates will rise over the next years. But it won’t be all in one direction. No price trend ever is.

If you take those two simple steps: renounce buying bonds and actually short them, you’ll be miles ahead of others. You’ll be part of the solution, and no longer part of the problem. Plus, you’ll make money.

This is in addition to accumulating real money like gold and silver. Have these things as the central part of your monetary and investment life and the next few years will be relatively comfortable.

Editor’s Note: As I said at the beginning of this issue, Chris Weber is one of the smartest investors I’ve met in the third-of-a-century that I’ve been in the business. (And I’ve met a lot of investors!)

I strongly recommend that every serious investor listen to Chris, and consider subscribing to his outstanding bi-monthly newsletter, The Weber Global Opportunities Report. You can get all the details by CLICKING HERE.

— Brien