In today’s Daily Journal, a free e-letter from Porter & Co…

Pension-fund managers must be reading my newsletter.

Two days ago, the Danish national pension-fund manager announced it was selling 100% of its U.S. Treasuries.

As I’ve been warning, the U.S. federal government – with almost $40 trillion in debt – has entered a fiscal “box canyon.” Congress cannot possibly finance its legislatively mandated spending: mandatory spending plus interest is locked in at around 37% of GDP before a single discretionary dollar is spent.

No one seems to realize what’s about to happen: a massive 50% decline in the major stock indexes. But I can show you the exact trigger: 5%.

The last time the U.S. was in a similar position was in the 1970s.

In 1968, we spent 9.1% of GDP fighting communism in Southeast Asia. And then we spent the next decade bankrupting ourselves by installing it at home.

The Vietnam War was an expression of U.S. foreign-policy arrogance. President Lyndon Johnson’s “Great Society” programs (passed between 1964 and 1968) were a matching expression of U.S. hubris in domestic affairs.

We declared “war on poverty” – and you’ll never guess what happened next. It’s like anything else, if you provide incentives, you’ll get more of it. Want more poverty? Spend more money on it.

Federal laws like the Economic Opportunity Act of 1964, the Housing and Urban Development Act (1965), and the establishment of Medicare and Medicaid through the Social Security Amendments of 1965 led to a profound structural shift in our economy. Vastly larger amounts of our GDP would be administered by the federal government, with almost no oversight and with absolutely no economic accountability.

By 1971, transfer payments exceeded defense spending.

These enormous new expenses were difficult to finance, so the government quickly became the world’s largest debtor. It was borrowing on a scale never seen before in peacetime. The Treasury was borrowing so much money it began to warp the entire global economy, breaking the entire system.

After World War II, we pledged to redeem dollars for gold at $35 per ounce. This “gold exchange standard” brought stability to the world’s financial systems. Our government and our banks couldn’t issue unlimited amounts of new money and credit. There was a fundamental limit: the size of our gold reserves. If we borrowed too much or printed too much, our foreign creditors were entitled to exchange their dollars for gold at the official exchange rate.

As LBJ’s spending caused soaring deficits (almost 3% of GDP in 1968), Congress sharply raised taxes in 1969 to prevent a global run on the dollar.

The Revenue And Expenditure Control Act of 1968 mandated a 10% (!) “temporary” income tax “surcharge” on individuals and businesses. That sent corporate tax rates to over 50%. It sent tax receipts to almost 20% of GDP! This huge tax increase led to a budget surplus in 1969 – one of the last balanced budgets of the century.

Do you think it’s possible to finance runaway government spending programs by raising taxes? It’s very difficult to collect more than about 20% of GDP in taxes because of real world negative externalities. People stop working and investing when it isn’t in their personal best interest. Socialism doesn’t work. Revenue can’t keep pace with costs because, as British Prime Minister Margaret Thatcher explained, “The problem with socialism is that you eventually run out of other people’s money.”

Even though 1969’s “temporary” 10% income tax surcharge was extended at the 5% level and even though President Richard Nixon passed a raft of new taxes (including a 35% capital gains tax), the U.S. federal budget deficit soon swelled to over 2% of GDP (in 1971).

As our creditworthiness declined because we couldn’t balance our budgets, more and more of our creditors said, “I’ll take the gold.”

In 1960, the U.S. held $17.8 billion in gold reserves. And foreign central banks held $18.7 billion worth of Treasury obligations. Notice the relative balance.

But by 1971, U.S. gold reserves had declined to under $10 billion, and foreign dollar creditors were now holding more than $50 billion in dollars! It was no longer possible to maintain the fiction that, at a $35 gold price, we could ever afford our debts. Nixon formally repudiated our obligations in August 1971. Our creditors got stiffed. We defaulted.

Did anyone learn any lessons? Oh no – quite the opposite. Freed from any restraints, Congress began to spend even more on domestic programs.

The most important change happened in 1972, when Congress mandated a 20% across the board increase to Social Security payments. This legislation also called for automatic cost-of-living adjustments (“COLA”) to occur annually, beginning in 1975. This linked our federal deficits directly to inflation, creating a feedback loop that was guaranteed to bankrupt us.

Deficits soared, despite the end of the Vietnam War.

It wasn’t long before the dollar had fallen so far that President Jimmy Carter was wearing sweaters on TV and telling the entire country to turn down the heat.

But what really matters to us is the impact this kind of socialist tax-and-spend financing had on the U.S. stock and bond markets.

And you might be surprised: at first all the extra spending led to a boom!

The “Nifty Fifty” stock market boom of the early 1970s sent share prices of high-quality, blue-chip stocks to record levels.

The Dow Jones Industrial Average was up 7% in December 1971, just months after the U.S. Treasury default.

But, of course, you can’t print prosperity. Our trading partners (most importantly OPEC) didn’t take our default lying down. As the dollar fell, inflation soared. Eventually – but not right away – that caused a collapse in the financial markets.

Between 1973 and 1974, stocks fell 50%.

What was the trigger? Ten-year U.S. Treasury yields broke back above their panicked August 1971 highs in February 1973. (See the table below)

The market realized that Congress wasn’t going to rein in spending – ever.

President Franklin Roosevelt administered America’s first default, in 1933, setting off the Great Depression.

FDR’s political protégé, LBJ, caused our second default by expanding the programs that FDR created.

President Joe Biden’s Inflation Reduction Act (talk about an Orwellian name) was more of the same – including $400 billion earmarked for “green energy.” This huge surge in spending sent deficits soaring and saw the bond market suffer its largest losses since the 1970s, with 10-year yields peaking at 5% in October 2023. Call this level the “Biden Bust.”

Here’s the big problem now: President Donald Trump’s One Big Beautiful Bill will add $5 trillion-plus to the debt (!) – assuming tariffs add $3.5 trillion to revenue. Deficits are now projected to be over 6.8% of GDP for the next decade.

There is no way – absolutely no way – we can afford these new deficits on top of our existing debt load.

The government’s pet economists will say that growth can bail us out. If so, why didn’t they try that before…?

Real GDP growth averaged 2.1% from 1970 to 1980 while inflation averaged 7.1%. And we’re in much worse fiscal shape today than we were in the 1970s. You can’t outrun the printing press when you’re already $40 trillion in debt and your annual deficits are at least 6% of GDP. There’s no chance.

Nobody seems to realize that administering the economy from Washington doesn’t work. We’re facing the same kind of economic cliff we experienced in 1971. We’re like a retarded kid who won’t stop touching the stove.

Is retarded too harsh a word? I don’t think so. Our interest expense is on track to hit $1.7 trillion in fiscal 2030. That’s more than we spent on defense at the peak of the Cold War, adjusted for inflation. When a country spends more servicing past debts than protecting itself, the game is already over. The only question is how violent the endgame becomes.

There are three things that will guarantee a repeat of the 1973-’74 crash:

If the 10-year Treasury yield crosses back above the “Biden Bust” 5% level, all bets are off.

If that happens, you’ll have to be out of the financial markets for the next 12 to 24 months.

These problems aren’t just taking place in the U.S. Across the West socialism has taken root and led to its inevitable economic rot. We’ve sowed the wind – here comes the storm. The Japanese bond market is already collapsing. The U.S. won’t be far behind.

The best way to protect yourself? Borrow dollars at fixed rates for long terms. Buy high-quality assets that you can hold title to, like real estate and ultra-high-quality blue-chip companies that are not overpriced.

For help to build a secure portfolio, see Porter’s Permanent Portfolio.

1. Trump walks back his Greenland threat. During a speech at the World Economic Forum in Davos, Switzerland, today, President Donald Trump said his administration would not use military force to take Greenland, and is only seeking to negotiate the acquisition of parts of the territory for U.S. security purposes. His comments seemed to calm the market’s anxiety, at least temporarily, with the major U.S. indexes opening higher this morning.

2. The ChatGPT era is beginning to look a lot like the dot-dom era. Just as the Netscape initial public offering (“IPO”) sparked a tectonic tech shift in the 1990s, the generative-AI revolution is mirroring that trajectory. In the first three years post-Netscape IPO, the Nasdaq 100 rallied 132%. Since the ChatGPT launch in November 2022, the same index has surged roughly 115% with a price correlation of greater than 0.90 with the 1995-1998 cycle. But the real fireworks began after year three. In late 1998, the index transitioned from a steady rally into a “melt-up,” gaining over 250% in the next 18 months. If the current cycle continues to rhyme with late 1990s history, tech stocks could have significant room to run.

3. Most unloved sector off to a roaring start in 2026. Bank of America’s latest Global Fund Manager Survey shows that the percentage of institutional investors with an overweight allocation to energy is near a record low. The best values in the market are often found in sectors where everyone has thrown in the towel, and thus we believe energy stocks will be among the best performers in 2026. We’re already seeing this play out in several of our favorite energy names in the Complete Investor portfolio, including the year-to-date performances of these four…

Venture Global (VG) +31%

Texas Pacific Land (TPL) +19%

BWX Technologies (BWXT) +21%

CNR Resources (CNR) +12%

Natural gas prices have soared nearly 60% this week – their largest two-day gain in history – as frigid temperatures sweep across the U.S.

Tell me what you think: [email protected]

Porter’s comment: I’ve only seen two real, bonafide gold market cycles (1993-1999) and (2000-2008). In my mind we’re still in the midst of a long gold bull market from 2009. Yes, I know there was a big pullback from 2012-2015, but gold didn’t come close to making a new low. What I recall from the other two cycles is that they ended because, in the first cycle: Stocks and bonds were far more attractive investments between 1996 and 2000 (high real interest rates, booming tech growth stocks). In the second cycle: The Global Financial Crisis sparked a run on liquidity and gold is a reserve asset. It was being sold, massively, to meet dollar margin calls. Had gold been a high-quality liquid asset, it would have soared. But, ironically, banks and investors had to sell gold to buy Treasuries because of banking regulations… in the midst of a banking crisis.

I don’t believe either of these outcomes is likely: real interest rates are probably negative (see the Chapwood Index) and stocks are extremely expensive relative to earnings. And given the huge duration risk in U.S. Treasuries and the government’s enormous debt and deficits, it’s far more likely that commercial banks and major investors will buy gold during the next crisis, instead of selling it.

So, from where I sit, as long as the government continues to run 5%+ GDP deficits, it’s likely that gold continues to compound. I think it’s also likely that the silver ratio continues to improve. Gold stocks should do very well again this year. They are still very cheap.

Porter’s comment: Great question. At the Kinsale Capital annual meeting this year, I’m going to take this up directly with management. And, of course, I’ll let you know what they say. One thing they should advocate is changing the regulations around gold in insurance company portfolios. Currently gold isn’t an “admitted asset” under national guidelines (“NAIC”), which are widely followed by the states, and states regulate insurance companies.

In the meantime, you should realize that the structure of Porter’s Permanent Portfolio is designed to mitigate risks by re-balancing annually and by having balanced exposure to stocks, bonds, gold, and cash. The bonds we hold via insurance companies are well hedged by our positions in sound money vehicles, like gold and Bitcoin.

And, don’t forget: while all of the facts I have today indicate that the Treasury market is growing more unstable and is at risk of an inflationary collapse, that doesn’t mean that I can accurately forecast Treasury rates in seven years’ time.

Things can, and almost certainly will, change. It isn’t clear to me that those changes will be better for Treasury securities, but, these risks will become more and more apparent to institutions, like Kinsale, to regulators, and to policy makers.

Good investing,

Porter Stansberry
Stevenson, Maryland

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