Recently, I’ve been closely monitoring a concerning economic trend: the rapidly expanding US government debt, which has now surpassed $33 trillion and shows no signs of abating. In fact, it looks like it going to get much worse. For investors, comprehending the potential impact of this escalating debt on financial markets and the broader economy is crucial.
But fear not; I’m here to demystify the complexities and highlight the essential insights. Here are three key points to consider:
- Escalating Debt Levels: The magnitude of the U.S. government’s debt is alarming. In just a few months, it jumped from $32 trillion to nearly $34 trillion, reminiscent of excessive spending but with far more dire consequences. This surge in debt is fueling government deficits, a worrying economic indicator.
- Increasing Interest Rates: The interest rates on Treasury securities, sold weekly, have seen a significant rise, with T-bills now yielding around 5.5%. Even the average interest rate on all government debt has climbed, reaching 3.05% in October. This is akin to experiencing a sudden hike in your loan’s interest rate – it’s painful.
- Burdensome Interest Payments: The third concern is the soaring cost of these interest payments. In just the third quarter, they hit an astounding $245 billion, doubling since 2018. Unlike personal loans, this financial burden falls on taxpayers, highlighting the profound implications of government spending on our finances.
These points dissect the ramifications of the soaring national debt. But what does this mean for specific sectors, companies, and markets?
Consider companies involved in issuing and trading government securities. The rising interest rates are boosting their profits, as higher rates typically mean higher returns. However, the flip side is the increased credit risk associated with high government debt, even for US Treasury bonds.
Conversely, companies not directly linked to government securities might face adverse effects. High public debt levels could lead to economic slowdowns or higher taxes, potentially harming their profits. So, what’s my strategy?
Investing Strategies for a Weakening Dollar
As an investor, I am concerned about the declining value of the U.S. dollar due to rising national debt levels. With inflation eroding my cash savings and the dollar steadily losing ground against other major currencies, I need to find investments that can provide returns exceeding inflation. Here are some options I am considering:
- Gold and precious metals have historically been effective hedges against currency devaluation and inflation. Gold prices typically rise when the dollar weakens. I plan to increase my allocation to gold and silver in my portfolio.
- Real estate is another hard asset that can maintain its value better than cash. Real estate investment trusts (REITs) provide exposure to real estate without having to buy and manage properties directly. Both residential and commercial REITs are worth considering.
- Commodities like oil, natural gas, agricultural products, and industrial metals tend to rise in price along with inflation. I can gain exposure through commodity ETFs that track various commodity price indexes.
Foreign Currencies and Assets
- Currencies of countries with strong economic fundamentals like the euro and Japanese yen tend to appreciate against the dollar during periods of USD weakness. I will research foreign currency ETFs that can benefit from dollar depreciation.
- International stocks and bonds can also be a hedge, as foreign assets may rise in value simply from currency appreciation versus the dollar. I will look to increase my allocation to international equities and bonds.
- Treasury Inflation-Protected Securities (TIPS) are indexed to inflation so their principal value rises with CPI. The interest payments also adjust with inflation. This provides protection against loss of purchasing power.
- I-Bonds from the U.S. Treasury offer interest rates linked to inflation. They can be a lower-risk way to generate inflation-adjusted returns on a portion of my fixed income allocation.
Equities with Pricing Power
- Stocks of companies that can consistently raise prices and pass higher costs through to customers can outperform during inflationary periods. I will target sectors like energy, materials, and technology where companies have greater pricing power.
- Dividend stocks of companies with strong free cash flow generation can provide an income stream that increases to offset inflation. I will look for stocks with consistent dividend growth records.
Adjust Portfolio Asset Allocation
- I plan to reduce my overall allocation to cash and fixed income which are most vulnerable to inflation and dollar devaluation.
- I will increase my target allocation to inflation-hedging assets like hard assets, TIPS, I-Bonds, foreign currencies, and equities with pricing power.
- I will rebalance my portfolio more frequently to maintain my desired asset allocation as market values fluctuate.
By diversifying into assets that can hold their value when the dollar declines, I can aim to preserve my purchasing power and achieve positive real returns above the rate of inflation. Monitoring macroeconomic trends and adjusting my portfolio accordingly will be key. Remember, always consult investment and tax professionals before making financial decisions.