Max Anderson Profile picture
Jan 3 43 tweets 10 min read Read on X
The only chart you need to understand macro economics and personal finance for the next 30 yrs 👇 Image
Coming out of WW2, the US federal debt hit a whopping 120% of GDP

Which was a problem, because of the next thing:

There's a law of nature when it comes to taxes

No government has ever been able to sustainably collect more than ~20% of it's GDP as tax revenue

Regardless of what it tries to do with taxes ratesImage
The US learned this lesson the hard way in 1945, when in an attempted to deal with our 120% debt to GDP conundrum, we raised the top marginal tax rate to 94%

What happened over the next 5 years?

Federal revenue absolutely cratered

From 20% all the way down to 13% of GDP by 1950

Raising taxes wasn't a solution
So what does it mean if your debt is 120% of GDP and your revenue is capped at 20% of GDP?

It means you have to grow the size of your economy SIX TIMES FASTER than prevailing interest rates, or you spiral into bankruptcy
Which is pretty fucked

Because it's hard to grow an economy

Even emerging economies (like the US in the 1950's) are typically only able to grow at ~5% per year

And mature economies (like the US today) only grow at 2-3% per year

And remember -- that growth number has to remain 6 times bigger than interest rates, else you get a debt spiralImage
Put another way, if your debt is 120% of GDP

Your tax receipts are capped at 20% of GDP

And your growth is capped at 5% per year

Then your government will quickly spiral into bankruptcy if interest rates ever push above a measly ~0.8%

That's a sticky situation
But thankfully for the US in the late 1940's, we had a special advantage

America had all the guns

The rest of the world was rubble

And scientists at the Federal Reserve had just discovered a magical new pixie dust

This discovery appeared to be a one-stop miracle cure for any dangerously over-indebted nation's financial woes

They called it ✨Inflation✨
So what did America do?

We took everyone's gold and we crammed the dollar down their throats

Held at gunpoint, we made all the other countries peg their currencies to the dollar

And then we unleashed our magical miracle cure

We let inflation rip, more or less unencumbered, for the next 35 consecutive yrs
And what happened?

America's financial cancer magically went into remission

By applying an inflation multiplier atop our economy's natural growth rate, we drove nominal growth through the roof

Which means the denominator of debt / GDP got really big really fast

And as a result, we crushed debt to GDP all the way down to 30% by the early 1970s

From the US government's perspective, things were looking pretty goodImage
But there was one problem

Well, two problems actually
Problem #1:

After nearly 30 years of making steady progress using inflation to grind down our debt-to-GDD

In the mid 70's, suddenly our debt-to-GDP bottomed and began to rise again Image
The US had stumbled its way into another war in a tiny little country called Vietnam

And the problem with wars is they're really expensive Image
America likes its wars, so we definitely weren't going to stop spending that money

But funding another war meant were likely just going to go right back to where we were at the end of WW2

With a really messy debt to GDD situation

Reversing all the progress of the past 30 yrs
So what was the answer?

You guessed it

Mas ✨inflation✨, por favor
Problem #2:

The more we juiced inflation

The more everyday people in America began to figure something out

Our magical wonder drug turned out to have some pretty nasty side effects

And the bigger inflation got, the harder those side effects were to hide
As the 1950's rolled forward into the 60's and then the 70's

It started to become difficult for everyday Americans to afford their groceries, or even put gas in their cars

And people started to get suspicious about whether this inflation thing really was the consequence-free miracle cure it had been purported to be
Political pressure on the maker of inflation, Federal Reserve Pharmaceuticals Inc., began to mount

All of a sudden everyday people couldn't make ends meet, and they were pissed

This supposed miracle drug had terrible side effects
And as it turned out, these side effects had shown up in clinical trials previously in other countries throughout history

Many times in fact, with disastrous results, every single time
And when people found out that Federal Reserve Pharma Inc. knew about those trials

and their disastrous results

and then decided to cram inflation down everyone's throats anyway

People had some questions
So what did Fed Pharma Inc do?

They raised interest rates

Not enough to actually stop inflation, but just enough to slow it down cyclically Image
This way the Fed could trick the public into thinking they cared about inflation

And they could even point to cyclical downturns as evidence that they were doing a good job fighting it

While still making progress on their real goal of keeping inflation high enough to continue grinding down debt to GDP to a more sustainable level
And by 1981, it was mission accomplished

We paid for our silly war

AND we reversed the rise in debt-to-GDP

pinning it back down to a cozy 30%

Fuck yea America Image
Yea, fine, we might have reduced the purchasing power of the dollar by 2/3 from the mid 40's to the mid 70's

And then cut it in half again from there by 1981

Ultimately destroying 80% of the value of everyone's savings... Image
But our debt-to-GDP was looking great!

And we didn't have any overly-expensive wars we needed to fund on the immediate horizon

So we entered a golden era

Interest rates and inflation peaked in 1980, and we were able to drive them straight down for the next 40 years Image
This was fucking awesome

A steady march down in interest rates for 40 years meant you could buy pretty much anything you wanted

with as much debt as you wanted

and it didn't matter

because you could just refinance at lower interest in a few years
And refinancing at lower interest rates meant you could literally get cash back

on an asset you bought with borrowed money

and your debt service payments either stayed the same or went down

and you still own the asset

the infinite money glitch
So there began the biggest bull market off all time

Every asset went up

But especially the assets that were easiest to lever up or buy with debt Image
Image
And in a culture of buying more and more stuff

With more and more borrowed money

At ever cheaper interest rates

With the ability to refinance forever

At even lower interest rates

Everyone jumps in

Even the government
So we let the deficits rip, and took debt-to-GDP right back to 120%

And now we're right back where we were at the end of WW2 Image
Image
So what does that mean for the next 30 years?

Well as they say, history doesn't repeat, but it rhymes Image
With rates having it the zero lower bound in 2020, and debt-to-gdp teetering on the edge of federal bankruptcy, we’re starting the 70-80 year cycle over again:

Inflation is likely to continue trending up for the next ~30 years

There will be cyclical spikes and troths, but the underlying trend will be up-and-to-the-right
The Fed will maintain the appearance of caring about inflation, raising rates whenever inflation spikes up

But always a bit too far behind the curve, with rate increases a bit too small to actually stop inflation

They will cause cyclical cool-offs in inflation, and claim credit for successfully combatting inflation

But the overall level of inflation will remain high and on a steady long term trend of up-and-to-the right
Investors lured in by recency bias of everything that worked over the 40 years from 1980-2020 are in for a rude awakening
Bonds will be the best way to lose money over the coming decades as interest rates continue their march up-and-to-the-right in line with, but always lagging, inflation
Similarly, the easy money made in real estate over the past 40 years is likely gone, with the refinancing dynamic that steadily drove asset prices up no longer in play

Boomer parents who got rich in real estate will continue to tell their kids that real estate is the best and safest investment

That is no longer true and hopefully their kids don't listen
That leaves risk assets -- stocks and crypto -- plus commodities, as the attractive places to play

We'll likely see risk appetite continue its trend up, as the hurdle rate to beat inflation continues to rise
We all know the CPI is both a cooked and lagging metric, so its not really useful to measure the hurdle rate you need to clear to stay ahead of inflation
Over the long term, the main driver of inflation is government deficits, as those deficits ultimately get monetized by the central bank, resulting in monetary debasement.

So with the US federal deficits running around 6%, on their way to 7%, that's a better long term hurdle rate to keep in mind

If an asset doesn't grow > 7%, and/or yield > 7% on a POST TAX basis (so likely needs to yield 10%+ on a pre-tax basis depending on your situation) it's likely a money-loser on a real basis over the decades aheadImage
If DOGE does a good job, maybe we can actually reign deficits in to something more reasonable like 4-5%

In that case, the hurdle will be less severe, and investors will be able to move in on the risk curve a bit
But in either case, the inflation hurdle rate set by ongoing deficits is just what’s required to keep debt-to-GDP where it is

And we know 120% is a scary and precarious level, so it’s likely we’re going the government is going to want an average level of inflation above that to gradually start grinding debt / GDP back down
So personally, I like to use 2x the ongoing federal deficit as my hurdle rate I need to target to stay ahead of inflation over the next 30 years

With deficit current running around 6.5%, that means I need investment returns >13% to expect to actually accumulate wealth over the long term
Hopefully DOGE does a good job and deficits come down to 4-5%, meaning inflation hurdle comes down 8-10% over the next 4 years

But either way, anything that yields <10% over the next several decades is dumb and not actually an investment
Bonds, dividend stocks and real estate are out

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Max Anderson

Max Anderson Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @maxjanderson

Jan 7
Most Americans assume a strong dollar is automatically a good thing

They view currencies like a scoreboard of how “good” or “bad” a country is doing

This is dumb, here’s why 👇🏼 Image
If you’re an American who spends most of your money traveling abroad, then yes, it feels amazing when the dollar is strong

It’s pretty fun to go to Japan right now, where everything is 33% cheaper than it was a few years ago Image
And it’s extra fun to visit Turkey, where everything is 7x cheaper vs a few years ago Image
Read 18 tweets
Nov 2, 2023
There are only 4 metrics that matter in any business:

1) profit per hour (of YOUR time)⏳

2) profit per employee 👥

3) market share 🥧

4) moat 🏰

These are the Golden Metrics 👑
The Golden Metrics are equally valid for companies of every size, in every industry

Whether you’re a sole proprietor, or a Fortune 500 CEO

If you fail to measure them, you will work way too hard, for way too long

And you will give up years of your life in exchange for mediocre outcomes
So don’t be a chump

✅ measure the Golden Metrics 👑

✅ set goals against them

✅ don’t think about anything else
Read 14 tweets
Jul 24, 2023
Still relevant 👇 https://t.co/cl6kYVzqup
Image
If rates stay at 5.5%

The cost to service America’s $33 trillies of debt

grows to $1.8 trillies per year

Which sounds like a lot of fun coupons

But unless you’re a mouthbreathing giga🧠 turbo nerd

trillies are a silly concept

So to translate for the midwits like me…
1.8 trillies is enough to buy:

🚀 55 more NASAs
🎓 6 more Education Systems
👵🏽 3 more Welfare Systems
🪖 1.5 more US Militaries
🏝️ 1.2 more Pension Systems
🏥 1.1 more Healthcare Systems

But that’s not all, because we have to remember that
Read 25 tweets
Jun 16, 2023
Massive $120bn drawdown in Reverse Repo yesterday, atop no significant change in TGA, and flat Fed Bal Sheet week-over-week.

Strong bid for Treasuries across the curve for everything 6mo+ duration coming out of yday's FOMC

$SPX ~200pts above fair value, while $BTC has reverted… twitter.com/i/web/status/1… ImageImage
Watch RRP closely over the coming days. If RRP continues drawing down aggressively (esp by more than what's required to fill the TGA) it may indicate the time has finally come for that sidelined $2T to re-enter the game

fred.stlouisfed.org/series/RRPONTS…

Updates at 2pm EST daily
Remember: RRP drawdown = mathematically identical to QE

Difference is the Fed doesn't control it, and RRP $ is supposed to be more risk-averse w/ duration

Which is why it's anomalous to see a bid across entire YC (everything 6mo+ duration) coinciding with large drawdowns in RRP
Read 5 tweets
May 22, 2023
$SPX is ~100pts above fair value based on USD Liquidity, looking forward 1-2 wks

$BTC is ~$500 above fair value based on same model

Neither divergence is significant on a coincident basis

But both are exceedingly offsides on a 3-4mo forward basis ImageImage
Based on most recent TBAC recommendations:

⚠️ Treasury should issue $733bn of net-new debt between now & end of Sep

✅ Of this, ~75% ($554bn) will be in the form of short-dated T-Bills, which can be mostly funded by pulling funds from RRP (liquidity neutral, this is good)
⚠️ The other 25% ($179bn) will be in the form of longer-duration notes & bonds, which can only be funded by pulling reserves from the banking system (liquidity down, this is bad)

home.treasury.gov/policy-issues/…
Read 6 tweets
Apr 28, 2023
I share this chart periodically

The media & most of FinTwit tend to focus on 2 main factors:

⚪️ Fed Bal Sheet
🟢 Net Liqudity

Recently w/ debt ceiling on horizon, there’s been a lot of talk around TGA 🔴 too

But none of that matters relative to what happens with RRP 🟡

👇 Image
There’s $2tn of excess liquidity still trapped in RRP

Which will come back out eventually

And unfortunately, despite our gov’s best efforts to make the 💵 worth as much as 🧻

two trillion united states dollars

still happens to be an economy-incinerating fuckload of money
To put things in perspective

When that money decides to bukkake itself all over the banking system, 2tn is enough to:

🚀 Tack another 1500-2000pts onto the S&P

🔥Gift the world another tasty box full of 20-30% inflation

with a bow on it, of course 🎁

(all else held constant)
Read 13 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Don't want to be a Premium member but still want to support us?

Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal

Or Donate anonymously using crypto!

Ethereum

0xfe58350B80634f60Fa6Dc149a72b4DFbc17D341E copy

Bitcoin

3ATGMxNzCUFzxpMCHL5sWSt4DVtS8UqXpi copy

Thank you for your support!

Follow Us!

:(