Guns and More Guns

Mr. Biden drags America into war on two fronts...

(Source: Getty Images)

Bill Bonner, reckoning today from Dublin, Ireland...

You only step into that river once.

~ Heraclitus

Through September, the US government had already borrowed $1.7 trillion, so far this year. It is on target to reach a total of $2 trillion before the year is out. This is the second biggest borrowing spree in history (after 2020).  

We doubt this record for borrowing will hold for very long. Ms. Janet Yellen says the US can afford to back the Ukraine on the Eurasian Steppe and Israel in the Levant – at the same time. Business Insider:

The nation's top treasury official said the US does not have to pick and choose between aiding Israel and Ukraine in their ongoing military conflicts.

It's been just over a week since Israel officially declared war on the Palestinian militant group Hamas after the group attacked several towns in southern Israel. Since the war began, President Joe Biden and US lawmakers on both sides of the aisle offered support for Israel, while at the same time pushing for the country to preserve innocent Palestinian lives in Gaza.

Guns and Butter

Lyndon Johnson famously declared that the US was fully capable of paying for ‘guns and butter’ – referring to the Great Society at home and the Vietnam war in Southeast Asia.

But the Biden team has gone further – with two ‘wars’ overseas…while the churner churns butter 24/7 at home.   

Johnson’s guns and butter campaigns were both flops. The Heritage Foundation calculates that $22 trillion has been spent on Johnson’s War on Poverty. But the poverty rate was 14% in 1965. Today, it is about the same.

And the war in Vietnam ended as it began – disgracefully. The North Vietnamese won the war and took control over both North and South Vietnam.

But Johnson’s ‘Guns and Butter’ spending had consequences. It produced the inflation of the ‘70s along with the fatal change in the US money system of 1971.  What will be the fruit of the ‘guns and more guns’ program of the Biden Bunch? We wait to find out.

But let’s take a guess. Inflation? Two failed ‘wars?’ More poverty?

Not Worth a Dime

This year, interest on the federal debt is at $883 billion – about even with the Pentagon budget. It is expected to pull ahead in the years to come as the debt pile gets larger and interest rates go up. Federal debt is already reaching up to $34 trillion. Each year, more and more of it must be refinanced – at higher and higher rates.  

US Treasury debt is the safest credit in the world – because the feds can print all the money they want. But the money paid to lenders back in the Johnson years is not the same money they get back today. And the money they get back tomorrow is not going to be the same as the money they get back today, either. According to the BLS, the 1965 dollar is now worth about 10 cents.  

Except for the decade of the 1970s, inflation rates were actually stable or coming down for most of that period. This time, the feds are running bigger deficits than ever – with a $50 trillion federal debt expected by 2030. And this time, interest rates are going up, not down. So each additional increment of debt is more expensive. Which means, the feds will have to borrow money to finance their wars…and borrow money to pay the interest on the money they borrowed to fund their wars.

Another thing that is different: globalization is not driving down prices the way it used to. In 1978 China began a series of reforms that turned it into an economic powerhouse. “To get rich is glorious,” said Deng Tsiaoping, as he unleashed some 500 million people to provide cheaper and cheaper products for Western consumers. That trend has played itself out. Workers in China are no longer content to work for peanuts. Imports into the US are no longer dirt cheap.

Higher Price Ahead

What else might make tomorrow’s inflation worse than yesterday’s? The industrial revolution is no longer providing big increases in productivity. And the ball and chain of regulations, restrictions and petty-fogging paperwork has gotten heavier and heavier. As a result of all of these things, US GDP is growing at only about half the rate it was during the Great Society era. Less output inevitably means higher prices.

Putting it all together:

• 2 wars, not just one

• Rising interest rates, not falling rates

• Imports from China are no longer holding prices down

• More regulation than ever

• The Industrial Revolution may have played itself out  (the internet revolution has not added much to GDP)

• GDP growth rates are only half of those of the ‘60s

While Wall Street is generally celebrating the big drop in inflation since last year, the actual inflation rate has gone up for the last three months. Did it bottom in June? Are we in for higher and higher prices…as far as the eye can see?

We don’t know. But that river never stands still.

Regards,

Bill Bonner

Joel’s Note: “Change is the only constant,” observed Heraclitus. (The pre-Socratic philosopher was full of witty aphorisms.) And here’s another change… or perhaps better stated, “divergence.”

The “Magnificent Seven” companies in the S&P 500 (what our macro analyst, Dan Denning, sometimes refers to as “The Generals”) are eating up a larger and larger portion of the index. Those top seven stocks are, by market cap, Apple, Microsoft, Amazon, Alphabet (Google), Nvidia, Meta (Facebook), and Tesla.

A decade ago, they accounted for roughly 7-8% of the total S&P 500 index by market cap. Today, according to figures compiled by Bank of America, they weigh in at close to 30%, a record high. Here’s the chart (from BofA)…

Why is this relevant?

For one thing, it means that the rally we’ve seen so far this year is not as broad-based as it might have been. Or rather, it is largely concentrated in those few, high-flying tech stocks.

“The equal weight S&P index is barely positive year-to-date,” explains Dan, “while the 'regular' index is up 13%.”

Take a look at the chart, below. (You can see the divergence beginning to appear back in March, when the Magnificent Seven/Generals began to take off…leaving the rest of the S&P 500 index in their dust.)

“The S&P 500 is a market cap weighted index,” continues Dan. “The bigger a company's market capitalization, the bigger the impact its price movement has on the direction of the index.” 

As you can see from the first chart, the last time the Magnificent Seven companies ate up so much of the S&P 500 total market cap was back in 2021 (when it hit 29.1%)…

“Just before BPR set sail,” Dan reminds us, “…and right before all those stocks crashed.”

Dan and Tom will be keeping an eye on the price action in their twice weekly market updates. If you’re not already receiving all their paid research, consider becoming a BPR member, below…