Have you ever heard of Stanley Druckenmiller? He’s one of the movers and shakers on Wall Street, the former head of the Duquesne Capital hedge fund, and a multi-billionaire who has been called one of the best investors in the world. He worked alongside George Soros in 1992 on a trade that nearly bankrupted the Bank of England and netted his firm more than $1 billion in a single day. To paraphrase the old advertisement: When he talks, everyone listens.
Druckenmiller is making a lot of investors very nervous these days because he just shorted U.S. Treasuries, betting approximately 20% of his entire portfolio against U.S. government bonds.
As there is widespread opinion on Wall St. that interest rates on government instruments will decline, let’s take a closer look at what that means. The price of a bond and its yield move in opposite directions. In other words, when the price of a bond rises, its yield declines. The reverse is also true, so when the price of a bond declines, the yield rises. Druckenmiller has been following interest rates very closely and he’s betting heavily that rates will go higher – much higher.
In his opinion, the U.S. will be entering a 1970s-style era of inflation, which led to rising interest rates, a volatile stock market, and calls for price controls to ease the pain of rising prices. We started seeing signs of this in late August, when Vice President Harris said there should be a federal law against price gouging by food suppliers and grocery stores.
A related story has been unfolding at the same time, and that one is America’s need to finance its debt. “America will need to sell $10 trillion in U.S. Treasuries every year for the foreseeable future,” says market commentator John Williams of the This is John Williams website. And, he adds, “This is happening at a time when foreign investors have been shrinking their ownership of U.S. bonds since 2015.” Among those investors are the BRICS countries (Brazil, Russia, India, China, and South Africa) and others.
What happens if the U.S. can’t sell all of the debt it needs to? The answer is actually very simple: Interest rates will rise to a point where investors become interested in bonds again. Obviously, raising rates in an already weak economy could cause serious problems for businesses, consumers, and even for the government.
One of the effects of rising rates is already evident in home refinancings. The recent rate of a 30-year fixed mortgage was 6.85%, much higher than it’s been in years - and that’s for people with an excellent credit rating. Many people thought that when the Fed cut rates by 50 basis points in September they would continue to decline. They did not, and Druckenmiller believes they will continue rising.
Dollar Doldrums
Williams believes that in the coming years additional countries will de-dollarize and inflation will become even more of a problem. “Since all of this is happening at the same time, you have to wonder what this means for banks that are holding huge loans,” he said. It’s been reported that unrealized bank losses are seven to eight times greater now than they were before the financial crisis in 2008.
How might investors react if rates do soar? Williams thinks they’ll move their capital to safe haven assets like gold, silver, land, and inexpensive homes. “Investors will be looking for ways to protect their assets. The last thing they’ll do is sit with their dollars thinking they’ll be able to save their way to financial freedom.”
The No Surprise Surprise
Many people anticipated there would be an October surprise right before the election, but that never happened. That is, unless you find it strange that one major candidate hardly spent any time talking about the numerous economic problems Americans are experiencing. But there will be plenty of time for that because these issues won’t go away any time soon.
For example, in 2023, the government paid $658 billion in interest on the national debt. This number, which grew by 38% from $476 billion in 2022, was the largest amount ever spent on interest and totaled 2.4% of GDP, according to a report by the Peter G. Peterson Foundation. Another big increase is expected in fiscal years 2024 and 2025, and it is rapidly approaching the trillion-dollar-a-year level.
Now look at these stats that were compiled by the Congressional Budget Office (CBO), which project how quickly interest payments will increase in the coming years. The CBO forecasts that:
in 2024 it will rise to $892 billion;
in 2025 it will rise to $1 trillion;
In 2034 it will be $1.7 trillion.
The CBO also projects that interest costs will be the fastest growing part of the federal budget over the next decade. And by 2054, interest costs are projected to be nearly three times what the government has historically spent on education, nondefense infrastructure, and R&D combined. Of course, the exact amounts will depend on the how much money the government will have to borrow and the interest rate at that time.
Although the CBO has a good batting average, no one’s forecasts are cast in stone and these could quickly change. For example, if the dollar tanks or if the economy collapses for any of a variety of reasons, it would be both more difficult and more costly for the government to borrow the trillions it will need.
On the other hand, there’s also some reason for optimism. Pres. Trump has hinted that if he wins, he may turn the job of reducing government spending over to Elon Musk, and Musk has publicly stated that as much as $2 trillion could be cut from the government budget.
If this happens, interest rates may not increase as much as some experts warn they will, and the government wouldn’t have to borrow quite as much money as is now being projected.
Whoever wins the election will have to not only to identify which programs get slashed but also work to get those cuts adopted. And that could prove to be a still more difficult mission. Yet it seems certain that deep cuts are coming, because government spending and borrowing are unsustainable at current levels.
We’ll have to wait and see how all of this plays out over the coming weeks and months. But one thing becoming clear is that Druckenmiller’s bet on soaring rates is starting to look very timely.
Sources: bloomberg.com; pgpf.org; think.ing.com; zerohedge.com
Gerald Harris is a financial and feature writer. Gerald can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
