Forbes: The Slow-Motion Economic Train Wreck

Article by Bob Haber in Forbes

What do macro investors read over the weekend? Stirring history, thru charts of prior cycles and markets. What about during a dreary Nor’easter in April? A true horror story- the CBO long-term projections for the US economy. What a life! But wait, why bother with lugubrious projections? The stock market is at an all-time high, the economy is beginning to boom, the US Census tell us poverty in America is at an all-time low, interest rates are still miniscule, reportedly inflation is subdued, and we are at peace. I study it because I do not want to be the Wile E. Coyote- already blithely over the cliff with no parachute.

When one dives into the Congressional Budget Office (CBO) website, one is proud of their ‘strictly non-partisan’ math and their candor. They admit they will be wrong and quite likely, dramatically so. Some examples:

• They assume all current laws remain unchanged; since this was done in March, it doesn’t include the new stimulus ($1.9 Trillion) or the other new ones soon to follow.
• They cannot be dynamic; so, for example, even as we borrow like drunken sailors, the CBO must keep interest rates flat.
• Spending for Medicare and Social Security continue even as their trust funds are exhausted. And so on and so forth.

The key findings are provocative, nonetheless. Population growth is slowing quickly. In their 2016 projection, they saw nearly 370 million Americans by 2030; now, they revised that down to under 350 million. That means the slowest labor force growth since 1950. Without a significant pickup in Labor Force Productivity (not anticipated), our real potential GDP growth is stuck in the sub 2% range for the next 30 years. So, if demography is destiny, then our destiny is a massive fiscal meltdown.

To battle the Pandemic, and the other ills of our society, we have borrowed heavily from this GDP-light future. According to the CBO, outlays will grow 8x faster than revenues every year from 2025-51.

Every federal trust fund will be insolvent by 2035 and publicly held federal debt will blow through 200% by 2050. And, of course, we did just have a $2 trillion giveaway (not included), interest rates are unlikely to remain at zero, and we will certainly have another recession, or three, by 2051 (the CBO cannot assume any recessions ever).  So, these are the optimistic starting points.

My guess is that many people inside the DC beltway have read this report. Why then would they even consider more spending bills that are unpaid for? I will leave that to your imaginations, but I would lead you to include 2022 and 2024 as years to imagine, specifically November in those years. At this point, my sense is they intend to inflate away these numbers and, if necessary, raise taxes dramatically. Even at a steady 3% inflation rate, the value of your savings, or the real value of debt owed, has halved by 2045. A 4% rate halves the debt by 2039, and a 6% rate by 2033.

So, what should investors do if they read the CBO document and worry about the future? Get to the future before the rest of the crowd catches on.

Just released data from the Treasury show that net foreign purchases of US Treasuries declined over $685 thousand in the last 12 months.

But wait, we need these guys to finance our infrastructure bill. What if they keep selling? The primary tradable relief valve is the dollar.

First, protect yourself by holding substantial non-dollar assets. We like silver, platinum, gold; and we think 20-25% is a good starting point.

Second, ask yourself what happens if the Federal Reserve moves to .....

To read this informative article in Forbes website in its entirety, click here.