Risks brought on by national debt are real
Every other year my wife's family hosts a week-long trip which has now become known as "Buerger vacation." Buerger vacation is this week, all 33 of us in one gigantic Virginia Beach beach house. Four generations of human beings ranging from one to 79 years old playing, cooking, eating and conversing 16 to 18 hours a day. I stepped out to a local coffee shop for a few hours to write the column, answer some emails and sneak in a mountain bike ride.
The conversations over bourbon and cocktails in the evenings are lively. Adventure stories, sports (especially the Pacers), politics, parenting, markets and economics are all on the menu. It's a great time, even if it's a little intense, and I credit my in-laws for pulling it off.
Last night we were talking markets. I was pontificating about my concerns over the Federal debt, discussed many times in this column. It was a perfect opportunity for me to slip into one of my proudest impersonations. I raised my voice, added a Texas drawl and sped up my words as I "explained" the problem.
My Zoomer nephew looked at me with a blank stare. "Why are you talking like that?" he asked. My brother-in-law, however, was impressed. "That's good," he laughed as he high fived me.
"Ross Perot," I answered, "you know, little guy, big ears, flip charts. He ran against Bush and Clinton in '92." My nephew shook his head, clearly he had no idea. Child.
Ole Ross Perot, Lord bless his soul, an early voice in the wilderness ranting about Federal spending and the national debt, pointing out the obvious to a country incapable of hearing him. While Ross may have been the loudest at the time, he hasn't been the last -- with famed investor Ray Dalio's new book "How Countries Go Broke" coming out just this week.
The national debt exists on a level seeming almost metaphysical. The concept of trillions of dollars of debt, now accruing a trillion dollars in interest, is so infinite in scope it means almost nothing. Like a faraway supernova locally consuming and destroying its entire solar system, but to us merely a slightly brighter star among billions of stars in the sky. Catastrophic, yes, but meaningful on our faraway blue rock? Not so much.
Unfortunately, however, the U.S. Federal debt is not a theoretical curiosity -- the math is real and so is the risk. Mr. Perot was spot on, but at least 40 years early. Ray Dalio is spot on now. Whether or not Mr. Dalio is also early is impossible to know, but I worry the peril associated with this topic may be moving beyond the "if" stage into the "how" part of the equation, and I've spent some time looking into just how the "how" might look.
After advising others on investing for over 30 years, I find individual investors in general to be well in tune with the gyrations of the stock market. And why not? The daily behavior of the stock market is fascinating, and I dare say fun, and the financial media does a great job of helping us maintain our collective fixation.
By the time, however, a U.S. federal debt crisis makes its way into the stock market, I'm afraid it'll be too late to get out of the way. In order to read the tea leaves on the threshold of when the U.S. Federal debt transitions from theoretical problem to actual calamity, interest rates and the more opaque bond market will need to be the focus.
The U.S. Treasury holds auctions for various types of securities used to finance the Federal debt on a regular basis. These auctions garner about as much attention from individual investors as power line maintenance gets from homeowners. We kind of know something must be going on, but only notice when the power goes out. It's highly likely the first phase of moving from a hypothetical problem to an acute crisis will be present as a failed Treasury auction.
Does a "failed Treasury auction" sound dramatic? If your answer is "no," it's probably correct. A failed Treasury auction will produce a headline, maybe even some consternation on the evening shows of the financial news channels, but it won't be a Pearl Harbor. Long term interest rates will spike, going maybe from 4.5% to 5% -- once again, not good but also not earth shattering.
The Federal government and the Federal Reserve have a number of tools to avoid this occurrence, and the tools are powerful, which means if this event does occur something has gone very wrong. Next week we will discuss the tools, and how some of them have already started to show up in the system.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
