Suddenly, All At Once
There’s been a ton of news in the last couple of weeks as it relates to the economy and financial markets - and it all has massive implications. The big themes I’m going to discuss are all deeply connected which makes it very interesting. We’re going to dive into all of it and discuss the ramifications going forward.
The world is changing. Fast.
Debt Death Spiral
The 10Y Treasury yield has been marching upward this month primarily after news of a US debt downgrade was announced as well as the new “big, beautiful bill” has made its way through the House.
This has been the metric that investors have been eyeing since Trump’s inauguration. Why? Because Treasury Secretary Scott Bessent has made it his goal to bring rates down. The 10Y Treasury dictates a lot of the lending market yields for Main Street, including 30Y mortgages.
Despite the efforts, yields have actually been going the other way. This makes borrowing more expensive and the government’s ability to refinance their debt almost impossible.
When yields are going up, it means there’s a lack of demand for US bonds. If no one is buying them, the rates need to rise in order to make them more attractive to potential buyers.
Right now, the market is signaling a lot fear in the US’s ability to pay its long-term debts.
The new tax bill that is going through the chambers of Congress will increase our deficit each year and add trillions of new debt over the next decade.
The market is saying “America has a spending problem.”
What happens next? The American government needs to borrow trillions, they want to cut taxes (revenue) and borrowing rates are much higher than they were over the last decade.
Right now, 13% of the total federal budget is spent on interest payment for the national debt. That’s almost $900B…
Interest payments are the third-largest spending category behind Social Security and Medicare. Back in 2020, interest payments were 5% of the total budget ($345B).
So, if spending/borrowing is going to continue to rise (a big reason being interest payments) and markets force interest rates to increase even more due to increased spending, there’s a spiral effect of more spending and higher rates.
This is how a country goes bankrupt. This is why Bitcoin is at $110k and Gold is at $3,300.
Now, the Federal Reserve is in a bind. There’s a supply/demand imbalance.
The Fed can either allow interest rates to rise and harm the economy OR they can provide the demand by “printing money” (purchasing the bonds) and risk inflation.
Narrative Shift
Because of the issues within the Treasury markets tied with the lack of political will to legislate any type of meaningful DOGE-esque spending cuts within Congress, there’s been a noticeable change in tune among the “higher ups” in the Trump Admin.
You’re watching in real-time the realization that our spending is out of control and will never be cut enough to make a significant difference to our current trajectory (bankruptcy).
Elon, Bessent now talking about accelerating GDP growth as the main priority to manage our debt situation.
How will they accelerate nominal GDP growth?
Inflation & deficit spending.
Running higher inflation will slowly erode at the value of our debt.
Think: taking debt out today and paying it back with inflated dollars tomorrow.
Deficit spending will stimulate the economy and hopefully raise tax revenue.
Think: tax cuts, massive infrastructure spending, etc.
This is why stocks and crypto have largely shrugged at the US debt downgrade by Moody’s or the treasury yields climbing.
If the government’s plan is to inflate away the debt and spend more, your only saving grace is through storing your money in risk assets.
New Paradigm
On CNN, Scott Bessent mentioned our deficit-to-GDP ratio. The measurement of our budget deficit compared to the size of our economy. Currently at 6.7%, we’re seeing this ratio at its highest point outside of a war or recession. This is a problem.
But again, the conversation has pivoted to growth. Can we grow our way out of this?
And another question: is deficit-to-GDP the best metric to use when analyzing the US’s spending issue?
What about looking at the US’s balance sheet - it’s assets? Estimates say the US has at least $100-150T in assets.
What if the US monetized those assets to generate revenue in America.
Ideas that have been suggested include: selling public lands, selling more drilling rights, other land-related royalties.
What if America does unleash its assets and monetize its vast balance sheet? What would that look like? Could the revenue burden be shifted from the American taxpayer?
A New Era of Pax Americana
For decades, the notion of “Pax Americana” - that is, American Peace - has been idealized by both parties. Ironically, both parties are filled with warmongering politicians.
"Peace through strength.” Station troops throughout the entire Middle East, topple their dictators and we’ll be welcomed as liberators.
This was a failed policy.
Trump completely put that neocon idea to rest. Thankfully.
Now, we’re a completely different approach to the Middle East - making deals. This was made evident from Trump’s trip to the Middle East where he met with leaders from Saudi Arabia, UAE and other nations.
Instead of forcing Western democracy on the region through the use of our military, we’ve adopted a new modus operandi of bringing the Middle East into the fold through shared business ventures and mutually beneficial deals.
This trip was a massive success for the President. “Massive” is understatement.
Many of the Middle East countries are looking to heavily diversify their economies and invest heavily in AI. For years, under the Biden Administration, the US’s stance toward the Middle East and AI has been very restrictive when it came to these countries receiving chips from companies like Nvidia.
Biden effectively put a blanket restriction on the entire region receiving GPU chips.
Trump - recognizing this and understanding that this could create an opportunity for China to step in and have their AI/semi companies strike up deals with the Middle East - made sure the US was their partner.
During the trip, a framework was rolled out for the partnership:
Replace Biden’s restrictions with the ability to import GPUs. This comes with an important provision: for every dollar that is spent to build out datacenters in the region, they must invest a dollar to build out our AI capabilities and datacenters domestically (yes, you’ve read that right).
The datacenters that are being built out in the Middle East must be 80% operated by American cloud-service providers and hyperscalers. This means that American companies will be running the compute for the datacenters in the region.
This opens up a whole new market for American companies. A market that is flush with seemingly unlimited resources to spend on building out their AI capabilities.
Tying It All In
I look at all these stories together and it really illustrates one major theme going forward. A new economy is being ushered in. For better or for worse, the playbook is changing. And it is changing rapidly.
The world is changing and so is the global economy. The one thing I really admire about this current administration is the dynamism and outside-the-box thinking.
We have significant problems economically in this country, primarily due to our spending. Maybe we do see a future where America is fully unleashed and we can grow our way out of much of our debt concerns.
A New American Renaissance.
One thing is for sure: artificial intelligence is the key to the future. For all countries, it seems.
Sovereign AI is a key theme. Sovereigns investing heavily in AI and datacenters to propel their economies forward. It’s a new arms race for chips and compute.
Position yourself accordingly.
GENCO