A Credit Disaster in the Making
Elon Musk's admission... Tempering expectations about government spending... DOGE's 'epic outcome'... The Fed's 'lone dissenter' says rate cuts should end... A credit disaster is coming...
The partial truths are coming quicker now...
Yesterday, I (Corey McLaughlin) reported on a partial truth that arrived four years too late... Treasury Secretary Janet Yellen finally admitted that the $1.9 trillion "American Rescue Plan" of early 2021 contributed "a little bit" to inflation. It was a hint of truth on her way out of the job...
The ink wasn't even dry on last night's Digest when we heard another partial truth...
It was from a prominent member of President-elect Donald Trump's inner circle: the world's richest man, Tesla CEO, and Department of Government Efficiency ("DOGE") co-captain Elon Musk...
In an interview broadcast live on Musk's X social platform as part of the Consumer Electronics Show in Las Vegas, Musk tempered expectations for the first time about his claim from before November's election that he could cut $2 trillion in government spending.
Think more like half that amount, Musk said...
We'll try for $2 trillion. I think that's, like, the best-case outcome. But I do think that you kind of have to have some overage. I think that if we try for $2 trillion, we've got a good shot at getting $1 [trillion].
There it is – a downgrade of expectations in what might change with Uncle Sam's fiscal situation under the Musk-and-Vivek-Ramaswamy-led DOGE – and we're not even at Inauguration Day.
This might not come as a surprise to the skeptical types...
Last fiscal year, the U.S. government spent $6.75 trillion – with more than $5.3 trillion of that being interest on the federal debt and programs like Social Security, health care, defense, and veterans' benefits – things that you would need Congress to cut (which is unlikely).
The difference after that amounts to less than $1.5 trillion, making it difficult to find a path where DOGE would find $2 trillion to cut... though one could hope.
In our annual "Top 10 Potential Surprises" episode of the Stansberry Investor Hour podcast published on Tuesday, Dan Ferris and I raised this exact point.
We discussed how one potential surprise in 2025 would be if Musk and Ramaswamy said it was "politically impossible to shrink the federal government by any meaningful amount"... or, as Dan put it, if "people found out that these guys were up against an absolute Leviathan political machine."
Last night's admission by Musk wasn't quite that, though it was close...
But Musk's comments weren't a complete downer...
It sounds like, on balance, he will look for ways to make the government more "efficient." He said there's plenty of opportunity...
It's like being in a room full of targets. You can close your eyes and you can't miss. There's just a lot of waste in government... especially the federal government. You've just got a situation where the checks never bounce. They've got the infinite money computer. And then the people that spend the money... it's not their money. It's very hard for people to care about spending someone else's money.
I certainly know people in the government who do care about, just as a matter of principle, spending money effectively. And they try to do so, and they can't. The system prevents them from doing so. And they even get told to do crazy things... where you get towards the end of the budget cycle, and they're told to spend up to their budget on nonsense stuff because if they don't spend their budget, their budget gets reduced. So it's actually sort of a perverse incentive to waste money. And then they kind of get punished for not wasting money. So it's just totally bananas.
He also talked about how an "element of DOGE" will be attacking regulations and getting rid of ones where the "harm is worse than the good... We want to get rid of nonsensical regulations that do not serve the public good."
Overall, Musk says the goal would be...
If we can drop the budget deficit from $2 trillion to $1 trillion, and kind of free up the economy to have additional growth, such that the output of goods and services keeps pace with the increase in the money supply, then there will be no inflation.
That, I think, would be an epic outcome.
Godspeed.
Turning our attention to the Fed...
The U.S. stock markets were closed today in observance of the national day of mourning for former U.S. President Jimmy Carter, who passed away on December 29 at age 100. The bond market was open, though it closed early. The 10-year Treasury dipped just below 4.7%.
Tomorrow could be a more meaningful day. Before the market opens, Uncle Sam reports "nonfarm payroll" numbers for December and an updated unemployment rate, which has implications for Federal Reserve policy moving forward.
If we see a stronger-than-expected report with a steady or declining unemployment rate, the Fed may go slower with its rate-cut plans or perhaps pause the monetary juice altogether.
The Fed's 'lone dissenter' says rate cuts should end...
During a speech to bankers in California today, Federal Reserve Governor Michelle Bowman said progress on "inflation appears to have stalled" with numbers "uncomfortably above" the Fed's 2% goal, and that December's rate cut should be the last of the current cycle because of the "upside risks to inflation."
You may recall Bowman was the rare, lone dissenter of the Fed's 12 voting members back in September when the Fed cut rates by 50 basis points. She cited the same reasons back then about inflation risks, while supporting a 25-basis-point cut.
With recent market behavior, Bowman doubled down on the risks of reigniting high(er) inflation with more rate cuts, saying she's concerned that the current stance of policy might not be as restrictive as others may see it. Bowman said…
Given the ongoing strength in the economy, it seems unlikely that the overall level of interest rates and borrowing costs are providing meaningful restraint. With equity prices more than 20% higher than a year ago, easier financial conditions may be contributing to the lack of further progress on slowing inflation.
In fact, concerns about inflation risks seem to partly explain the recent notable increase in the 10-year Treasury yield back to values last seen in the spring of 2024.
So she prefers "a cautious and gradual approach to adjusting policy." She might be ahead of the curve again.
Meanwhile, more and more folks are falling behind on their credit-card payments...
A recent report from financial services company Bankrate showed that 48% of Americans carry credit-card debt from month to month. Even more worrying, half of those people have carried debt for more than a year.
That means debt loads are getting even higher, thanks to record-high credit-card interest rates. These rates tend to trend with the short-term lending rates dictated by the Fed.
So credit-card debt is rising at an incredibly high rate. As our colleague and Stansberry's Credit Opportunities editor Mike DiBiase explained in an August issue, that's a big problem...
Credit cards account for the fastest-rising debt in America. It grew 11% in the second quarter compared with a year ago. That marked the ninth straight quarter of double-digit increases. Considering credit cards are the most expensive form of debt, this spells disaster.
And that "disaster" is starting to show. Just look at this chart from stock-price-data firm Barchart...
The chart shows that credit-card defaults are at the highest level since just after the financial crisis. Simply put, that's when a credit-card company believes a balance is unlikely to be paid back, so they write it off and consider it uncollectible.
By this metric, folks are struggling the most in more than a decade.
This is a telling story...
Inflation is eating into folks' purchasing power, and they're having to put purchases on credit cards to keep up. But credit cards' high interest rates make carrying a balance more expensive. So folks fall even further behind.
And according to Mike, this is only going to get worse. In the December issue of Stansberry's Credit Opportunities, he wrote...
Consumer savings will continue to be depleted and credit-card debt will keep breaking records. Delinquencies and defaults on credit-card and car loans will continue to rise. So will corporate bankruptcies.
For now, markets haven't paid too much attention to the cracks beginning to show in consumer debt. But soon, Mike says investors won't be able to ignore the problems any longer because of the likelihood that high inflation won't be tamed...
So Fed Governor Bowman just sounded the alarm on what Mike believes.
The seeds are in place for another 1970s-style 'twin peaks' in inflation...
In the December Credit Opportunities issue, Mike wrote about how the U.S. economy could see a repeat of the "twin peaks" of inflation it saw in the 1970s – which would trigger the next big credit crisis in the U.S. You see, interest rates would need to go even higher to fight a trend of rising inflation again.
As he wrote...
Just like in the mid-1970s, everyone thinks inflation is tamed. And yet, once again, government spending is out of control – and the money supply is on the rise.
We're not in the situation [Fed Chair Paul] Volcker found himself in yet. But the Fed's actions have made it an inevitability...
A recession is very near. We expect the government will make the same mistake it did in the mid-1970s and try to "fix" the economy with more monetary stimulus.
In short, Mike says the Fed trying to "fix" the economy will ultimately lead to even higher interest rates and a recession this year.
Subscribers to Stansberry's Credit Opportunities can get the full details on this coming crisis and Mike's advice for how to position your portfolio to weather this possibility right here.
New 52-week highs (as of 1/8/25): Antero Resources (AR), Alpha Architect 1-3 Month Box Fund (BOXX), EQT (EQT), GEO Group (GEO), Kellanova (K), United States Commodity Index Fund (USCI), and VeriSign (VRSN).
In today's mailbag, feedback on part of yesterday's Digest, which discussed data-center growth and government spending... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Why would the president-elect choose to spend government money on the industry with the highest earnings? It seems that the main players are in the Mag 7 who already have plenty of cash. I'm just sharing an observation which doesn't make sense to me..." – Subscriber Rodger G.
All the best,
Corey McLaughlin with Nick Koziol
Baltimore, Maryland
January 9, 2025