Navigator Algorithms – Back to Cash
I likely won’t get the saying right, but it goes something like “some months seems to last weeks and some weeks seem to last years.” This week seems to fit the bill as one of those weeks that lasts years.
We started the first week of 2021 by briefly tagging all-time index highs on Sunday night. By Monday, the indexes had chewed up nearly 3.5% to the downside before slightly recovering on Monday afternoon. By Wednesday, disgruntled voters had seized the capital building in Washington, D.C., and by Thursday we had achieved new, all-time index highs. We are flirting with slightly higher levels this morning.
Perhaps the Fed had a hand in keeping the equity markets stabilized, but having captured a nice, 37% return in the core, Navigator model in less than 24-hours, we took the profit and went back to the sidelines so I could take the weekend to digest everything.
The chart above is something we all need to digest. In the midst of the turmoil this first week of 2021, U.S. Treasury interest rates gapped higher every day. Admittedly, rates are still low. Nevertheless, many variable-rate mortgage loans reset in January, and higher rates will zap more of these borrowers ‘ already thin incomes. Most importantly, with trillions of Chinese Virus related sovereign bond rollovers around the world coming up in March, the trend of rising interest rates is more than disturbing.
For fun (I have a twisted sense of humor), let’s run the U.S. deficit numbers once more on these pages, but this time with a bit more precision. Here is the live capture of the national debt (just the Federal) at this writing.
So we have about $27.7 trillion in current national debt. By the way, you can also see the $4 trillion budget deficit we currently run to add to the total (in the lower right corner of the chart above). For some context, then, let’s now take a quick peek at the annual interest on the debt
Ok, that figure is in the upper right-hand corner of the chart above at $392 billion. Now, let’s do a quick calculation of what happens with each increase of one half of 1% (.50%) in interest rates. This is kind of like calculating the difference in your mortgage or car loan payment at 1/2 of 1% intervals. I don’t think my calculator goes that high, so I will illustrate the point with an excel spreadsheet.
Alrighty then, as Jim Carrey would say, for every one-half of 1% rise in rates, we add $138 billion in annual interest. With the current, annual budget at about $3.6 trillion, a rise in interest rates from their current levels close to zero to say 3.5%, would add close to $1 trillion in additional interest payments to the annual budget. That is more than we currently spend on defense, about the same amount we spend on social security, and a bit less than we spend on medicare/medicaid. The figures are in the chart directly above us.
By the way, even these figures assume no increase in the debt – which is sadly an erroneous assumption. Its just that you have to freeze the figures for a few minutes to even be able to analyze them briefly. Just while I have been writing this, the debt has risen another $90 million.
Investors, friends, and family, how can this possibly end well? I hope you are looking forward to my 2021 outlook video. I will share what all of us can do to survive what our government is doing to us. It does not matter whether they have an “R” or a “D” next to their name; they are all in on it. There is not enough of a tax base to handle this, even if you ban all abortions forever.
So, I will have more to say, but we need to think hard and be careful for now.
A.F. Thornton