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sovereign debt crisis and potentially hyperinflation. I mean that those are really the only two possibilities that that are out there. And you know, most people are completely oblivious to to those outcomes, but that's what's going to happen. And the only question is when? Are we weeks away? Are we months away?
Or are we still a few years away? I I don't know the answer to that question. We'll know after the fact, but we don't know now. So, I think between now and then there is a crisis that we we can't avoid. [snorts] There's no way. The The Fed has put itself put the country in a no-win situation. So, all they're going to do is pick the route that does the least political damage in the short run.
And that's probably just to create massive inflation. I think the can kicking is going to be increasingly harder now. I really think that you know, we're running out of road here. You know, it's it's really the chickens finally coming home to roost for a lot of sovereigns that have been borrowing too much money.
And it was always inevitable that rates were going to go up, but the only thing that was sustaining all the debt was the fact that rates were still so low. And that actually encouraged more reckless borrowing because it didn't seem that it was that expensive. People would say, "Hey, borrow as much as you can because the rates are so low." But I was always warning that the problem was the rates are not locked in.
That eventually the rates can go up, and then debt that is manageable becomes unmanageable. I mean, we're already at a point where we're paying $1.3 trillion a year in interest. By next year, it'll be 2 trillion. But what if in a couple of years the national debt is 50 trillion, which it will be in you know, another 3 years we'll be at 50 trillion.
Um what if what if interest rates are 8% 3 years from now? I mean, that's not that high. That's that's 4%. I mean, that's 4 trillion dollars a year in interest. That's 80% of tax revenue. I mean, and if we had to pay 4 trillion in interest, we'd have to borrow the money. So, that would mean our budget deficits would be 6 or 7 trillion a year.
Is is that even possible? Is that financeable? I I don't think so. So, I think between now and then there is a crisis that we we can't avoid. So far, he has been effective at convincing the markets that he's an inflation hawk. Uh, but that's not the case. Um, that he's going to do whatever it takes, that he is laser-focused, uh, and and don't doubt his resolve.
Uh, they're going to bring inflation down to 2%. I think he's all talk. Um, you know, he's been Fed chair for 5 months. What has he done? 125 basis point rate hike, big deal. Meanwhile, the money supply keeps growing. The Fed's balance sheet keeps growing. Look at the the the numbers we got today on producer prices, up 1.3% last month.
That annualizes to 17% a year. Um, you know, we're so far above the Fed's 2% target, but more importantly, the number is rising. It's not coming down. So, it's not like the Fed is, you know, making less progress, that inflation is coming down slower than they hoped. It's not coming down at all. It's going up.
They are way behind the curve. Even if we get another 50 or 75 basis points of hikes over the next, you know, 3 to 6 months. It's too little, too late. Inflation is rising faster than the Fed is hiking. So, that means real rates are falling. The Fed is getting further and further behind the curve with each rate hike.
I think November is probably a lock, uh, you know, because they're probably going to skip skip October. So, once we have November, the midterms are over. [cough] So, the the political stake the political stakes are are are gone. So, they'll probably start hiking. But again, it's not going to be enough.
They're not They're not going to raise rates nearly enough to be effective. The box that they put themselves in, it's the box that I warned that they would be in years ago, um, before they they they created it. But, as they raise interest rates to fight inflation, they actually make inflation worse because not only are those higher interest rates a cost that gets passed on to consumers, just the way businesses pass on their rents and their raw materials and their wages, but the higher interest rates themselves mean the US government has to pay more interest to bondholders.
And that's A, that's kind of like a stimulus in and of itself because now you're putting more money in the hands of the bondholders to go to go out and spend and push up prices. But those bigger deficits, um, those the higher interest expense pushes up the budget deficits. So, now the budget deficits become bigger.
And that puts more upward pressure on interest rates. Uh, and it also puts more pressure on the Fed to monetize those larger deficits to prevent the interest rates from rising, which creates even more inflation, which puts even more upward pressure on interest rates and budget deficits. So, it it this is a, you know, self-perpetuating doom loop that you can't get out of.
Because if the Fed says, "Oh, well, then we're not going to We're We're not going to raise rates." Well, then the dollar crashes and then prices soar for that reason. So, there's no [snorts] way that the Fed has put itself put the country in a no-win situation. So, all they're going to do is pick the route that does the least political damage in the short run.
And that's probably just to create massive inflation. You know, the reaction uh was a little bit surprising today, although, you know, the market reacted to the CPI was only slightly worse than expected. The PPI was way worse. I mean, it I mean, more than twice, almost three times as bad. Uh yet the Dow's up 450 points today and the Nasdaq is down about a half a percent.
It It was down more earlier. So, the market is reacting well and that's probably because the bond market is not going down. I mean, the bond market actually initially fell when we got the hot CPI and then rallied. And today it seems like it's about unchanged, so it's not going down on this bad data.
But the the the the producer price index is a forward-looking uh measure. And if producer prices are going up now, consumer prices are going up later. So, if people think, "Oh, we don't have to worry about this. This is just the producer." Yeah, until he passes it on to consumers. But if the producers don't pass it on, then they eat it in their profit margins.
So, that should be worrying the stock market if all these companies are stuck with higher costs that they can't pass on cuz if they can't pass them on, they come out of their profits. So, that's bad for stocks. If you look at the total stock market and there's thousands of stocks there. But yesterday eight times as many made 52-week lows as 52-week highs.
And you Donald Trump likes to point to the stock market as a barometer of the success of his presidency. Hey, we got this great economy. Look at the stock market. Now, he says that we had the worst economy in history under Biden, but we had record high stock prices under Biden, too. So, clearly, you know, you can't just point to the stock market as a measure of success when we had a great stock market during what Donald Trump describes as the worst economy in our history.
So, uh but when you actually look at the real stock market, not the S&P or the Dow, right? The Dow's only 30 stocks. And the S&P is 500 stocks, but over 400 of those stocks are not doing well, and 60% of the 400 are in a bear market, meaning they're down more than 20%. But if you then look at the broader stock market, all of the publicly traded stocks, uh it's even worse.
In fact, the breadth has not been this bad. And the breadth is when you look at, you know, advanced decline and, you know, the new highs versus new lows. There's only been two times in the last 100 years where it's been as bad as it is right now. And that was 1973 and 1999-2000. And following both of those, the the S&P fell almost 50%, 48, 49%.
So, that's a dangerous situation to be in. So, I don't think the overall stock market is doing as great as Donald Trump claims. I think there's a lot of problems brewing beneath the surface of the major averages that are also very skewed by a handful of stocks that are doing all the heavy lifting. And these are the stocks that are most exposed to the AI build-out.
Oh, I think the Federal Reserve and Fannie and Freddie and FHA have completely devastated uh mortgage lenders. If you think about what happened during the uh 2008 crisis, from about 2007 to 2010, you had about 10% of the mortgages that went into default. And that was enough, you know, to collapse the subprime market, bankrupt Fannie and Freddie.
It took down Bear Stearns and Lehman Brothers. But the total losses were about $450 billion in right in write-downs from those defaulted mortgages. And the reason that lenders lost so much is because real estate prices dropped about 30%. So that you foreclose and, you know, you're not getting your money back.
But because the Fed slashed interest rates down to zero, the value of the mortgages, the 90% of the mortgages that didn't default, on paper went up. Because now the banks were holding on to these mortgages where they were collecting 5%, 6%, 7%, and rates were zero. They were making a lot of money on those mortgages.
In fact, the unrealized gain, I I estimated about 1.2, 1.3 trillion. So the unrealized gains on the mortgages that didn't default were triple what they lost on the ones that did. So that was a big cushion that helped, you know, the banks and the lenders get through the crisis. Where we are today, without any defaults, I mean, I'm sure there are some, but just without any defaults, if you just look at the eight trillion or so mortgages that are outstanding, the fixed-rate mortgages.
I only talk about the fixed-rate mortgages. They have an average duration of 25 years right now and an average coupon of 4.6. Some are lower, some are higher, but the average is 4.6. Current mortgage rates are 7.5. The unrealized mark-to-market losses are two trillion dollars. That That is like four times more than the actual losses during the financial crisis.
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