This Is Big - Interest Rates Up, Interest Costs Up!

Duration: 9:43 1381 transcript words EN summary

Video summary

The central theme of this discussion is that rising interest rates and increasing bond yields are poised to become the defining economic factor for the next five to ten years, overshadowing the current hype surrounding artificial intelligence. After nearly two and a half decades of artificially low interest rates that encouraged excessive borrowing across governments, private equity, and real estate sectors, the financial landscape is shifting dramatically. Long-term US Treasury yields have returned to levels not seen since 2002, signaling the end of an era where debt could be serviced easily through cheap money. This transition marks the beginning of a painful deleveraging phase in the long-term debt cycle, a concept famously illustrated by Ray Dalio, where the cost of servicing debt eventually becomes unsustainable and forces a reckoning that cannot be ignored. The speaker argues that the current trajectory is leading toward a Ponzi-like scheme where governments are increasingly borrowing money simply to pay interest on existing debt, rather than funding productive growth. As refinancing costs explode, interest payments on the national debt have already doubled in recent years and are projected to consume up to 75% of federal deficits by the end of the decade, rendering current deficit levels of around 6% unsustainable. While inflation was previously used as a tool to manage these burdens, it has failed to stabilize prices or protect purchasing power, instead exacerbating wealth inequality. The reliance on artificial intelligence to solve these structural debt issues is dismissed as unrealistic, with warnings that if the massive capital expenditures for AI data centers do not yield returns, the resulting economic contraction could push the global economy from a recession into a depression. To navigate this volatile environment, the video suggests that investors must prepare for significant market corrections and potential crises similar to historical events like the 2007-2009 financial crisis or the Greek sovereign debt crisis. The speaker highlights that stock market valuations are currently at historically low levels relative to dividends, implying that a return to normal dividend yields could result in massive percentage drops in indices like the S&P 500. In light of these risks, the recommended strategy is value investing and holding fixed-income assets like short-term Treasuries to maintain nominal certainty while avoiding the pitfalls of over-leveraged positions. Ultimately, the message is that investors need to assess their personal risk tolerance, ensure they have manageable debt structures such as fixed-rate mortgages, and focus on real assets that can survive structural economic shifts, rather than relying on speculative bubbles or technological saviors.

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Good day, fellow investors. Few talk about this because everyone has an AI bubble in place of their head, but this could be the key factor for the next 5-10 years when it comes to money and investing. And that is higher and rising bond yields. If we look at US, UK, France, Japan, we are 4-5% on the long-dated 30-year Treasuries, far from the below two crazy low interest rates in the 2020s. Especially if we they take a longer-term view, the last time the US 30-year Treasury was at these levels was in 2002. 25 years almost of low and lower interest rates, a little bit higher in the last few years when everyone expected rates to be cut. Rates now are higher despite all the expectations. And the situation is that with the lower interest rates over the last 15 years, all were borrowing and spending like drunken sailors. And now they're still doing it, but okay, now we are AI excuse. Governments, private equity, real estate, nobody has the intention to pay off the debt. They're just trying to refinance forever. That's something that doesn't work. It's hard to predict, but we are in the first signs of the long-term debt cycle development or progress or process. Ray Dalio showed it. At some point, there must be deleveraging, and that's the painful part of the debt cycle. We are still somewhere here growing, and that happens when the cost of debt can't be serviced anymore. When everyone is saying, "Guys, if we lend you more money, you're just digging a deeper hole." And here is the whole Let me just discuss this JPM chart in detail. Let's start with the federal deficits and interest payments over time. Before interest rates really went down and everyone was printing money, the average deficit was around 3% that can be sustained with inflation. Now, with money printing low interest rates, the average deficit is 6%. 6% is not sustainable. And that is now reflected in long-term bond yields. Plus, if you look at net interest payments, those are a little bit less than half of the deficits now, but those grow over time to 75% of the deficit. That's crazy. Then, it means that you're borrowing money to pay interest. That's a pyramid. That's a Ponzi scheme, no matter how you look at it. If you look at the US national debt 4 trillion, maybe by the time you're watching this video, 3.8% yield, the cost is 1.5 trillion. So, the US government is still enjoying low interest rates. And now as they have to refinance that, the costs are exploding. This is 1.5 trillion increasing the deficit. And it was just half a trillion 4 years ago. Then, the deficits are there. The debt will pile on. 4% of 50 trillion by the end of this decade, that's 2 trillion. That's double the current interest payments. That's 100% of the current deficit. The first process in that long-term debt cycle is when interest payments start to bite, and that is starting. The solution for everyone is inflation, but inflation has a cost. For the last 6 years, US people haven't the promised 2% inflation. There is no price stability. The rich get richer, the poor get poorer, no matter how you look at it. US, Germany, the same. German 40-year yield going to 4%. They are finally losing control of the money experiment we have been enjoying for the last 15 years. And that will be the key topics for the next decade. Interest rates, debt, debt cycle, not AI. But, I just asked AI because is it really true that politicians, policy makers think that AI will solve all the debt issues? To me, that's crazy. But, I looked and Gemini says, "Yes, there is a report from the Congressional Budget Office. AI will solve everything." Here it is. Oh my god, this is all the lulu, in lack of a better word. The situation is that the key risks are rising, interest payments are rising. Any shocks, this gets ugly very, very fast. Just take Europe and the 2012 crisis. Look at the long-term interest rates for Greece. Those went close to 40%. In 2009, everything was great. Greece looked, "Oh, we're all making money." Spain, Portugal, everything. If you look at the debt to GDP now of Spain, it is higher than it was in 2011-2012. It's like tinder in a wood. It just accumulates, accumulates, accumulates, then you have some drought, and then you have fires. The situation is bad. Deficits, interest costs, and the ugly side of that is when it all deteriorates, and it starts deteriorating fast. 2007, everyone was enjoying the boom. 2009, it was the world ending. But, that was just real estate. Now we have governments, private equity, businesses, Google borrowing billions to build AI data centers. If this reverts, this is the big one. What is the good? Well, if this reverts, that's the big one, but you can be protected at least nominally with a 5-year Treasury 4.3%. Perhaps even less risk in a 2-year Treasury at 4%. It's impossible to predict, but at least you have some certainty. If you just say this is all crazy, I'm going fishing, and who cares? Wake me up when everyone is panicking. As I said, it's impossible to predict, but while we are fishing, we know that there is true cost impacting true issues, and that will trickle down as we are already seeing it in the piling deficit. Interest payments doubled. On top of everything, if the AI bubble bursts, and it all bursts sooner or later, if this capex from hyperscalers doesn't lead to a return, GDP will be in decline because AI is now holding it, all the investments. Bigger deficits. Without AI, without the deficits that are huge, that are stimulating to the economy, this is not a recession. We are looking into a depression. But there might be another good for young people. You can perhaps wait in Treasuries, but then perhaps the interest rates will be higher. Compare this. What's better? 4% on a Treasury of 1% of the S&P 500. That is the historical lows and a quarter of the historical averages that led to 10% long-term returns. This is insane. If the dividend yield just returns to 2%, which was the 2012 situation, that's a minus 50% for the S&P 500. If we go to 4%, that's a minus 75 for the S&P 500. If all risk materialize at one, investments, small investments, governments, this, that, this will be the final debt cycle that we will see in our lives. And perhaps 75% will be little. Of course, I'm speaking in real terms. 1,500 for the S&P 500, let's say three, four K in our nominal terms, because they will try to print it away. And that Spitznagel's 80% crash scenario. You can check that in the video here, in the link in the description below. I'm just looking at the 100-year chart. It happened once. It happened twice. And I'm not going to count the 2000-2009, because I think we are still in the same bubble. So, it has to happen. The big one we have not yet seen it. It happens every 40 years. This is a blip. So, this bull market started in 1982. I will be 43 in September this year. So, we are 44 years in the bull market. We are three, four years overdue. I'm not here to predict. I'm just saying, if you invest, you must be ready. How to be ready? First key question to answer is, whatever happens, am I okay? If interest rates go to 15%, am I okay? You have a fixed mortgage, I hope, with these low interest rates that I told you to take in 2018 to 2022. Now, the game is different. But you have to analyze the risks of your life. Do you own businesses that will survive, perhaps even thrive? Real assets. No structural life issues. That's key. The answer is value investing. We'll do a lot over the next few years. Subscribe for being ready. You can check what I do on my research platform.