What the Movie “Wall Street” Can Teach Us About Today’s Economy

The U.S. Is Approaching a Debt Spiral… So Buy These Assets Now.

There comes a point in almost every movie—typically 25 to 30 minutes into the film—when the story you think you’re watching is suddenly flipped upside down.

In story structure, this is called the “anti-thesis.” It’s the moment the lead character finds out that the world they’re living in is actually the opposite of what they’re accustomed to.

In screenwriting, this happens at the “act break,” when Act 1 yields to Act 2.

In the movie Wall Street (best movie ever), that moment comes about 29 minutes in, when Michael Douglas’ character, Gordon Gekko, tells Charlie Sheen’s Bud Fox to “Put a hundred thousand in one of those bow-wow stocks you mentioned. Pick the dog with the least fleas. Use a stop loss… And buy yourself a decent suit. You can’t come in here looking like that. Go to Mort Sill’s, tell ‘em I sent you.”

In that moment, unimagined wealth begins to rain down on Bud’s head—the anti-thesis to his previous life as a poor stockbroker at a dead-end firm.

This column, as you might imagine, is not an analysis of the Wall Street screenplay. It is, instead, a story I’ll call the “American Anti-Thesis.”

I’m not, by nature, a pessimistic person. But the unescapable reality is that this promises to be a painful period for the entire country.

Our story starts in September 1981, when yields peaked at nearly 16% on the U.S. Treasury’s 10-year Treasury note, the benchmark paper Uncle Sam sells to the world’s bond buyers.

From that point on, interest rates broadly moved in one direction in America: down.

This serves as Act 1 in our story… For almost the next 40 years, America’s government and consumers grew accustomed to falling interest rates that made borrowing cheap for everything from cars to homes to bass boats to Disney vacations… and for governmental debt to fund political giveaways, vast tax breaks for corporations and the wealthy, and wars of immense pointlessness.

It was a fantastic period overall. Asset prices shot the moon, particularly for bonds, houses, and the stocks of companies that thrive on debt and consumer spending (think: technology stocks and real estate investments trusts focused on shopping malls and housing).

Then, in August 2020, came the act break.

After nearly 40 years, interest rates on the 10-year Treasury note bottomed out at a barely perceptible 0.55%, and they began to rise.

They’ve not stopped.

Now, the 10-year rate is north of 4% and primed to go higher.

Thus, the American Anti-Thesis: After two generations of ever-lower rates, Americans find themselves in a world they are unaccustomed to… an upside-down world of ever-higher interest rates.

Here’s the problem with that…

Uncle Sam, as you likely already know, owes more than $31.5 trillion to his lenders.

A large portion of those IOUs are older debt that was sold when interest rates were dirt cheap. But America’s debt rolls over regularly.

When Uncle Sam pays off one tranche of loans, he immediately gets another. It’s the only way he can keep the lights on.

It’s like paying off American Express with a new Mastercard.

As that debt rolls, however, the low-interest rate debt goes away and is replaced by bonds priced at today’s higher rates.

In that switch, America’s debt-serving costs rise, making the funding of government that much more expensive. This, in turn, either forces Uncle Sam to reduce spending… or to sell even more debt just to afford the higher interest rates.

At some point, this cycle of rinse and repeat slips over into a malevolent debt spiral in which Uncle Sam is selling increasing quantities of debt just to afford interest payments on previous debt… which forces the sale of even more debt to afford the higher and higher interest payments on all the new debt.

Now, apply ever-higher interest rates to that storyline.

Debt that is painful at 3% and 4% is debilitating at 6% and 7%… and is a bullet to the head at 10% and higher.

That is the American Anti-Thesis we are now in—a world Americans and America has never known.

Obviously, this will roll through family finances, not just Uncle Sam’s pocketbook.

Prices will fall for lots of belle-of-the-ball assets today, like those aforementioned technology stocks and retailers who relies on the aspirational spending of the dwindling American middle class.

Housing prices will have to plunge so that buyers can afford the much higher interest payments.

Debt-servicing costs on credit cards will pull lots more money out of family wallets, given that credit card debt is now at record highs and inflation is forcing Americans to rely ever-more on plastic to afford their lives.

Ultimately, what I am getting at here is that the American story has entered a new act—the anti-thesis. It’s an act we cannot avoid because no one—neither government nor the Federal Reserve—controls the story at this point.

The underlying facts—entrenched inflation and historic levels of business, consumer, and government debt—are what they are. Financially, this act is going to prove to be a struggle for the government and American families.

Good news: A much brighter day is on the way. The hero always wins in the end.

Bad news: There’s a crisis to come first. That has to happen for the hero to realize where he went wrong.

And that crisis, quite likely, will be the worst America has seen since the Great Depression.

Prepare accordingly: Own gold, silver, bitcoin, and a healthy dose of commodity stocks.