Debt Bomb Ticking

Holiday Debt Bomb Ticking: Think “Black Monday,” Not “Black Friday”

Like an overeager neighbor who puts up his front-lawn Christmas lights in September, the market is too early and too eager in celebrating an apparent victory over inflation. In contrast, prudent investors should look at what the Federal Reserve is actually saying and doing instead of just assuming that Santa’s coming early this year.

In November, ahead of Thanksgiving and the Black Friday sales that follow it, stock traders are leapfrogging each other to buy mega-caps and dumping small-caps. Evidently, the prior mantra of higher-for-longer interest rates that prompted a surge in government bond yields and put pressure on stock prices, is now old news.

Oddsmakers are pricing in a zero percent chance that the Fed will raise interest rates at its next meeting. At the same time, stock traders are working under the assumption that the central bank will cut interest rates in the second half of 2024.

However, what Federal Reserve Chairman Jerome Powell actually said to the IMF was, “The Federal Open Market Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance.” He added, “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

In other words, Powell “will not hesitate” to tighten the screws on American businesses with sky-high borrowing costs, while making the American dream of homeownership impossible as mortgage rates touch 8%.

It’s the middle class that’s bearing the brunt of Powell’s single-minded quest to bring inflation down to 2%. Housing affordability is at an all-time low, and shockingly, the median U.S. homebuyer payment is at a record $2,900 per month.

The median newly sold home price is up to $416,100 now, so paying for a home in America is a long journey that most middle-class families cannot and will not complete. But again, this is just collateral damage in Powell’s eyes.

Worse yet, Powell truly believes that the Fed is responsible for the trajectory of inflation – not the oil price, not supply-chain disruptions, but just the central bank. Moreover, the Fed’s only tools will be higher-for-longer interest rates and quantitative tightening: “Going forward, it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth of aggregate demand,” Powell declared.

The other collateral damage will happen not at the individual level, but collectively as America’s sovereign debt will mount and the interest payments – not to mention the principal owed – will continue to soar.

We can call it government debt, but it’s no secret that the taxpayers will end up footing the bill. And it will be a jaw-dropping bill to pay, as the federal government is currently paying $1 trillion per year in interest payments on its debt.

Thanks to rampant spending and high interest-rate policy, the U.S. government spent $659 billion on debt interest payments in the 2023 fiscal year that ended in September. For context, that figure is up from $476 billion in fiscal 2022 and $352 billion in fiscal 2021.

Incidentally, those interest payments are on sovereign debt that now exceeds $33 trillion. So, under current government and central-bank policy, there’s little to no hope of actually paying off the nation’s debt load and it’s getting harder just to service the interest on it.

As for large-cap stocks, the recent rally might last through the post-Thanksgiving Black Friday shopping holiday as the “resilient” U.S. consumer is supposedly keeping the economy and markets from collapsing. Just be ready for a Black Monday type of event to follow, maybe not immediately but in due time as the other shoe always drops sooner or later.