Winter is Coming
Part I of the most depressing thing I've ever written
In the HBO hit show, Game of Thrones, the throne of the Kingdom of Westeros is hotly contested by the dynastic ambitions of dozens of noble families. Each family has an emblem — a sigil, and a motto — house words. The family that lives in the farthest northern territory where it is cold at barren, the Starks have the words: “Winter is Coming,” a warning designed to remind all that times of plenty come to an end and only those who prepare will weather the deep cold.
Winter is Coming for the world economy now. No economist will ever tell you the date that a recession will start, they’ll only look back and tell you when it started. I’m not an economist, I’m no professional at all. An economist gets paid whether he was right or wrong, and no one ever checks his track record before asking his opinion. I dont’ have that luxury because I own businesses, invest money and live or die by the strength of my predictions. This newsletter is free and this advice is worth what you pay for, so act or not as you will. Your choices are your responsibility, no investment advice is intended or tendered here. I’m letting you in on my thinking so you can add it to your own.
But Winter is Coming.
There is a widespread myth that a recession is defined as two quarters of contracting GDP growth in a modern economy. It’s a soundbite fact, not anchored in much truth. In reality, a recession is what the Council of Economic Advisors to the President say that it is. By the previous definition, the COVID quarters shrank the national growth rate sufficiently to qualify as a recession … but no one ever called one. The Council took a pass and said “we must look to other factors,” whichever are most convenient at the time.
There are some rules of thumb, though, that throughout the trailing 100 years and economic cycles, we’ve picked up as indicators that a contraction is incoming. Almost every single one of those indicators are in the red now. The recession is simply waiting for a triggering event, and there are two on the horizon that will have the power to pull the rug out from under this economy and show us that the Emperor needs some boxer shorts.
Student Loans
On October 1, more than 60 million US households who have had their student loan payments held in abeyance will see payments come due for the first time in over 2 years. Get this: student loan debt has gone largely unserviced by the debtors and now they have to begin paying again. The lowest monthly payment that will come due is $187 per month, the Wall Street Journal thinks that the average will be about $300 but these figures wildly miss the mark.
A young girl that works for me and who has $130k in student debt has been told that she must now pay $2400 per month starting October 1. She makes $100k per year and now a full quarter of her after-tax dollars are going to flow out to service that debt. While she (and hundreds of thousands like her) have options to explore — from a Biden debt relief plan that is far from constitutional, to re-amortizing the loans, and in some very slim cases refinancing them — these people are stuck in a system that is eating their economic futures alive.
And before you start, grandpa. This isn’t the student loans you and your kids had access to, and the predatory lending practices that lead these kids to take the loans would be criminal if they were used for any other loan. “Sign this if you want to go to school here.” Many of the loans are 11% in interest, and all of them are not dischargeable in bankruptcy. If you came to me and said “Trey, I want to borrow some money and I can’t ever file bankruptcy on you, and I’ll pay twice the national interest rate,” I’d mortgage the house, farm and both vehicles to find the money for you and your friends. The massive lenders did that — enabled by the Student Loan reform package signed by Bill Clinton — and consequently college tuition grew by a Compound Annual Growth Rate of 12.6% for the last 20+ years.
These kids are paying more for an education, with less of a shot at a long term career, and financing it at higher rates, and less advantageous terms than any generation before. It is another example of the wealth transfer from the young to the old in this country, and one that people would rather moralize about and politicize than solve. As I’ve said many times before, there are fixes to be made and no member of either party will take the bold step to do it … because its political suicide.
So, besides all the politics, let’s do the real math that’s days away from us. In the most conservative model, $300 x 60 million households is $18 billion of consumer spending that will go from the household budget of student loan holders to the student loan services and not the wider economy … per month. That’s $216 billion that disappears from productive spending unless Sallie Mae heads out to Target for a spending spree of epic proportions. In reality, I believe the numbers due are much higher because of the shift adjustments in payments and we are looking at a potential of up to $1 trillion in spending that evaporates, in the worst case scenario.
American consumer spending has been the strongest buttress for the world economy since World War I and its about to take a hit so severe that the CFOs of Fortune 500 companies are telling analysts “If you aren’t taking student loans into account, you’re setting our earnings targets too high.” Was-Mart and Target will be lucky to make earnings at all next year. See that? Two of the world’s largest retailers may not make any money at all next year. And that’s not good for an economy on shaky ground anyway.
China at War
Sun Tzu taught that nations must bring their opponents to a battlefield of their choosing at a time most opportune for victory. America is the sole world hegemon, and second place isn’t even playing the same game. Republics are not comfortable being called Empires but we’ve been imperial in our world politics stance since 1945. Then we were one of many, now we are the only one left and in order to stay on top, we must bait our competitors into battles from which they cannot shrink and which they cannot hope to win.
Don’t believe me? Ask Putin how much he wanted to invade Ukraine and how much he felt like he had to? History’s strongest military alliance, NATO, is pointed like a dagger to his heart, and then it invites his largest source of food into its fold so that any aggression against it triggers a world war that crushes Russia and erases its independence forever. He had no choice to invade now … because he couldn’t invade after Ukraine joined NATO. And we did that, we set the scene to make that happen so that now a potential foe drains his own lifeblood out over several years, spending blood and treasure in pursuit of a victory he cannot achieve, or hold. Incidentally, we do so at the cost of no American soldier, and with 100 billion highly inflated dollars.
Now China is facing — and falling for — the same gambit. They will invade Taiwan within the next 2 years and bring the devastation of war and economic collapse onto themselves. There is no such thing as meaningful Chinese military power. Their largest seagoing vessel was a floating restaurant and casino in its former life, I kid you not. We have 18 aircraft carrier groups with the power to erase a nation’s identity in the span of a few months … and we’re building 2 more. Our aircraft (when we can find them) are faster, smarter, deadlier and sexier than anything produced by another nation. Our personnel are smarter (higher average IQ), stronger and better supplied (average number of daily calories and grams of protein), and more dedicated to the higher cause (soldier sentiment) than any other nation. If China moves on Taiwan, they are calling down a storm the proportions of which they cannot survive.
Economically, also, China is the outsourced workshop of the world. There is no such thing as meaningful Chinese consumer spending. The world just went through an exercise in alternative logistics planning where near-shoring and on-shoring are the key watchwords in the boardroom (after you sit through the pearl clutching DEI presentation). China has become a nice-to-have, and has lost its place as a must-have for manufacturing capacity if it ever had one. When we stop buying from China and the bulk of our allies do, too, they are done. No more currency, no more unchecked spending, no more infrastructure investment and even more dire, no more food (check the stats on how much they import), and no more security apparatus to keep hungry citizens in check. China, quite simply, will cease to exist as we know it and will devolve into the largest wasteland of failed states ever to have existed.
And don’t tell me that they own all of America’s debt. They do own a ton of it, to be sure, and we’ve devalued it by raising interest rates. Their average coupon rate is now 2.1%, on 10 years that are now paying 5% and going higher. We manipulated them into buying something we can make worthless for them to hold. Want to be repaid? No problem, we’ll pay you with inflated dollars. In full. How you like them apples?
And they have no choice. Their system doesn’t allow flexibility of alternative political viewpoints, and their allies either have very little already (North Korea) or are spending it all in a proxy war against the rest already (Russia). If (and its really when), they take the final step off the cliff of history, the world economy will grind to a halt. Goods that are in China will never make it anywhere else, and we’ll have to buy them elsewhere for more money. Millions of Chinese will starve and the US makes enough food to feed us (and them) now, at a profit.
So much for the idea of the Chinese century that Beijing so carefully crafted, and the West so eagerly bought into over the years. It will never come to be.
Winter is Coming, but before it does, a precipitating event must come. My analysis tells me that it’s here now. Student loan payments coming due will reduce consumer spending materially and will slow economic growth at a time when interest rates must continue to rise for both geopolitical economic reasons. Stagnant growth and high inflation. Seems familiar, right? Stagflation II will soon be upon us and the Chinese strategic hacks will think that means we are weak enough overlook an aggressive action they’ve been jedi-mind-ticked into taking. Boom, recession. And it will be deep and long.