Winter is coming
In 2019, I observed that, like the grasshopper, the US was running a huge government deficit during the salad days of low interest rates, low military spending, and no recession. We spent when we should have saved. Today, interest rates have risen, military costs are increasing, and we have negative savings for the next recession.
Historic spending without a crisis
The US approach to government spending changed around 2000. For the first two centuries of the country's existence, the US Government borrowed to finance major wars and crises such as the Great Depression. Since 2000, we have run enormous structural deficits even without any crises. The result is unprecedented fragility, a grasshopper-like lack of preparedness for the next big problem.
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| From 1790-2000, debt declined after crises |
As I noted in 2019 (before COVID), the US should have been saving to get ready for crisis. The 2019 financial situation was benign - very low interest rates so low cost to service existing debt, very low spending on the military (from an historical perspective), and no recession.
Let us focus just on military spending. During World War II, military spending was 40% of US GDP. In recent decades, US military spending has declined from 9% to around 3% of GDP -- less even than the 5% we currently demand of NATO countries.
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| The US military spending is low; the world is dangerous |
China is the most economically-powerful adversary with a greater population, faster economic growth, and massive increases in military spending. Russia is economically weak, but aggressive and stocked with nuclear weapons. The world has many other dangers.
What is the implication of massive US debt and deficits in a world that requires more spending to pay interest, more demands for military spending, and the inevitability of economic recessions? The answer for me remains, higher real interest rates. With myriad demands for capital, the economic price of capital - the real interest rate - has to continue to increase.
February 2026 Portfolio Performance
In February, the Dow Jones Industrial Average returned 0.25%, while the Chicken Little Portfolio gained 0.26%. Year to date, Chicken Little has returned 0.43% vs. 2.06% for the Dow.
February 2026 was a solidly positive month for risk assets around the world. Non US stock markets outperformed the US. Gold had an amazing month returning 8.72% for a 22.06% gain in two month of 2026 following an historic 2025. Long-term Treasury bonds have had a strong start to 2026, with 2+% each month.
Bitcoin lost 19% in the month is is sitting with a 50% decline from all time highs. Cryptos other than Bitcoin has suffered much more severe declines. Ethereum has lost more than 60% of its value, and many other cryptos have lost over 90% from their highs.
March 2026 portfolio position
Chicken Little Portfolio remains 100% in cash. No trades in February 2026. Like Vladimir and Estragon, I am still waiting.
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