The dangerous “Big Money” Illusion… unsustainable federal debt loads can’t be ignored … your best shot at protecting your wealth long-term

 

As I write Monday, the Russia/Ukraine conflict has markets falling, oil surging, and gold proving that it’s not an antiquated relic after all.

We’ll return to these stories in tomorrow’s Digest.

Today, we’re looking at a related-yet-different issue.

In short, our nation is on a dangerous path.

It’s one that’s increasingly jeopardizing your financial well-being.

And though the answer to “what can you do about it?” involves investing (which we’ll talk about shortly), the purpose of this Digest is to look bigger picture.

It’s to fully recognize and accept what’s happening in our nation, understand the implications for your dollars, and then begin to shift your thinking in terms of how to respond.

Let’s digress a moment…

Regular Digest readers recognize the name of InvestorPlace’s CEO, Brian Hunt. Beyond helming our company, he’s an accomplished investor, trader, and teacher. He’s written a series of essays that read like a Master’s Course in investing, which you can read for free here.

Last week, Brian sent an internal email to InvestorPlace’s executive team. It’s something he’s been thinking over for a while.

I felt it was a powerful thought-piece that could benefit our Digest readers, so I asked Brian’s permission to annotate parts of it and share it with you.

Today, let’s look squarely at what’s happening in our nation and then pivot to how to blunt its impact on your wallet.

***The age of the “Big Money Illusion”

To begin, here’s Brian framing what’s happening today:

There’s a huge economic force that is starting to wipe these people out.

Sadly, this force will only get stronger over the coming decade.

I worry that many people won’t survive this huge wipeout.

And it all comes down to what I call the Big Money Illusion.

The Big Money Illusion is related to inflation…

We all know inflation has become a huge problem in America.

In January 2022, the government reported that inflation was running at 7.5% per year.

It’s probably even higher than that, because the government is trying to downplay and underestimate inflation so people don’t riot in the streets.

But for now, let’s take the government at its word and say inflation was running at 7.5%.

At the same time inflation was running at 7.5% per year, the yield an investor could earn in government bonds was a paltry 1.5%.

I hardly have to tell you this is a horrible situation for investors saving up to live a better life and looking to earn income on their savings.

You earn 1.5% in yield… yet lose 7.5% of your wealth through inflation!

That’s a real-world loss of 6%…

Real returns are what matters when it comes to buying essential things like food, gasoline, medical care, and insurance.

Real returns are what matter when it comes to your true quality of life.

Real returns are what really matters because if the value of your stocks go up 5% but inflation runs at 5%, you haven’t actually grown wealthier…

… All you did was tread water.

***But isn’t inflation about to recede?

We all know that inflation is a problem today. But you’ve likely also read arguments for why inflation will fall over the coming quarters – we’ve published many of them here in the Digest…

For example, the kinks in global supply chains will be resolved. This will return supply/demand imbalances to greater equilibrium, which eases consumer prices.

Then there are more favorable year-over-year inflation comparisons. This will reduce headline inflation numbers.

Plus, advancements in technology will bring down the prices of all sorts of tech products and services.

All of this is true. And we believe these disinflationary factors will take pressure off of prices in certain parts of the economy.

But there’s another factor at work here – a source of inflation that’s incredibly powerful, with the potential to offset these inflation-reducing factors:

Our government.

***Unsustainable debt and spending, and what it means for your buying power

Back to Brian:

In February 2022, the U.S. national debt hit $30 trillion for the first time.

That was nearly a $7 trillion increase from January 2020, just before the COVID-19 pandemic.

Between the future promises made via Social Security, Medicaid, and Medicare, the government has a mind boggling $100 trillion in unfunded liabilities.

Brian points out that, yes, COVID-19 was what triggered a record amount of government spending. But the structural problems of America being deeply in debt have been in place well before the pandemic.

The U.S. government has been spending way beyond its means for years, and now owes more money to more people than anyone else in the world.

And this takes us to the heart of the problem – a mindset that’s growing, and threatens to offset the various disinflationary forces we referenced a moment ago.

Back to Brian:

Around 10 years ago, the content of our national character started changing. And not for the better if you ask me.

You see, around 2010, America experienced a tectonic shift in how we view success and govern our country.

Despite occurring with zero fanfare, this historic “paradigm shift” has put our country on an entirely different path than the one that made it the greatest, most prosperous country on Earth.

This paradigm shift has made it so that every day that goes by, American citizens that succeed through hard work and fiscal responsibility are valued less and less in our country.

This critical part of our “national soul” is being gradually replaced with a desire for endless government benefits and an utter disregard for financial responsibility.

The dignity of work that means so much to so many people is being replaced with waiting for the next “stimmie” check… the next handout… the next government job… the next free home loan… the next free this or that.

You can see this “handout culture” at work by the rising share of government spending as a percentage of the overall U.S. economy.

The chart below looks at public debt to GDP since 1798.

As you’ll see, today, this ratio is higher than it was during the Civil War, World War I, and World War II.

And if we look at modern history – call it since 1920 – the clear trendline is up.

 

In Brian’s email, he digs into what’s behind this explosion in federal debt to GDP. We don’t have the space in today’s Digest to cover all the details, but one big issue is the explosion of “net tax recipients.”

Back to Brian with the takeaway:

Over the past 40 years, the percentage of people getting more in government benefits than they pay in has exploded.

Politicians discovered they could win more elections by promising more and more “free benefits.”

And the percentage of Americans that are “net tax recipients” has exploded as well.

As we speak, it’s estimated that 60% of Americans are net tax recipients.

Well over half of the people in this country get more than they put in.

***To get a real sense for this, we can turn to U.S.DebtClock.org

As you’re about to see, the U.S. National Debt stands at more than $30 trillion. On a “debt per citizen basis,” that’s $91,051 per citizen.

But if we look at that debt amount on a “per taxpayer” basis, it jumps to a whopping $241,611 per taxpayer.

 

When more than half of a country’s citizens receive more in benefits than they pay in, you’ve crossed a very dangerous line.

That’s when the majority discovers it can vote itself more and more benefits… while paying for less and less of those benefits out of their own pockets.

When you reach this “point of no return,” the net tax recipient majority will always vote for politicians that promise more benefits… more spending… more freebies.

At the same time, any politician that campaigns on sound financial policies has a zero chance of winning an election.

We’ve past the point of no return.

In the future, you can expect America’s growing spending and debt addictions to grow and grow.

Brian points toward the ugly consequence of all this…

Inflation.

Yes, supply chain resolutions, better comparables, and technological advancements will help inflation numbers in the coming quarters. But longer-term, if the government doesn’t change course, vastly higher inflation is inevitable.

And keep in mind, it doesn’t take long for inflation to seriously dent your personal buying power.

If, as we outlined above, you lose real wealth at a rate of just 6% a year, in six years, you’ll have 31% less buying power… and in 10 years, you’ll have 46% less buying power.

***What can you do about this?

To prevent this Digest from running too long, I’ll only hit the highlights of Brian’s email.

First, is stay away from government bonds. Brian sees these being money-losers for a long time.

So, what will do the best job of protecting your wealth? Brian points toward something he calls “Elite Cash Generating Stocks”:

There’s no set definition of an “elite business.”

But most smart people agree that elite businesses share some unique traits.

An elite business has a durable competitive advantage over its competitors.

For example, Wal-Mart has a durable competitive advantage because its huge global distribution network allows it to sell goods at unbeatably low prices.

It’s very, very difficult for smaller firms to compete against it.

An elite business usually has an outstanding brand name. Coca-Cola is a good example. People associate Coke’s logo and name with quality soda all over the world.

Brian also references McDonald’s, Pepsi, and Hershey Foods. But it’s not just consumer goods, many drug companies make the cut: Abbott Labs, Merck, Pfizer…

This is hardly an exhaustive list, and these elite, cash generating stocks are found in many different sectors. But wherever you find them, they carry two huge benefits: One, they have pricing power to raise prices to match inflation; two, they often pay a steady and increasing dividend to investors.

Here’s Brian with more:

Owning an elite, dividend-paying business is a good inflation defense because its strong brand and loyal customer base will allow it to raise prices along with inflation.

Its dividend will often increase at a faster rate of inflation, so the value of your income stream remains intact.

These companies are safer, better places to park long-term wealth than any currency or any government bond.

They are better for parking long-term wealth than gold.

***See what’s coming and make sure you’re prepared for it

If we pull back and look at the world and investment markets today, there are plenty of reasons to be worried:

The Russian/Ukrainian conflict… a misstep in policy by the Fed… the high valuations of certain parts of the investment markets despite recent weakness… and clearly the issue of inflation we’ve talked about today.

Any of these market overhangs could weigh on stocks in the near future. But on a big-picture scale, our nation’s spending and debt levels have put us on an unsustainable path. And the best, long-term way to protect your wealth from the effect of this path – inflation – is through the Elite Cash Generating Stocks Brian referenced.

Do you have enough of these stocks in your portfolio today?

In the days ahead, we’ll continue bringing you updates on this topic, as well as more evidence of the scope of the problem. For now, just recognize the path we’re on, and what it means for your money.

Have a good evening,

Jeff Remsburg