War without preparation
President Trump is proposing a 50% increase in military spending for the coming year. If this budget were passed, it would only partially restore a severe decline in military spending. A 200% increase to $3 trillion would get the US back to where we were in 1962. The current focus is on the middle east, but China is our most potent adversary.
The fiscal chickens are coming home.
After 25 years of persistently large deficits, and underinvestment, the US faces a tsunami of fiscal trouble. We have had decades of low debt service costs, underinvestment in the military, and limited and brief recessions.
Now we simultaneously face the end of all three of these fiscal tailwinds.
Headwind 1: Trillions for the military.
Restoring US military spending to 9% of GDP, the 1962 figure, and the average post world war II, seems crazy. It requires moving from $1 trillion per year to $3 trillion. However, not only do we need to boost spending dramatically, even with higher spending, it will take years to restore our military preparedness.
Consider, for example, shipbuilding. China now has more naval ships than the US, although most experts believe the US has a qualitative advantage. However, in a war, the US will need to build ships, and we have almost completely lost our shipbuilding capacity.
China has at least 20 times our shipbuilding capacity, and China has developed hypersonic anti-ship missiles. So we need to invest hundreds of billions of dollars every year for many years, just to help our navy be able to compete with China.
Headwind 2: Recession
The US will have a recession, because they are inevitable. During recession, the US deficit increases dramatically because revenues decline and expenditures increase.
The US has only had three recessions since the early 1990s. Furthermore, those recessions were relatively brief.
A recession is coming. It might be longer and more challenging than any we have experienced in a long time. When the recessions hits, government deficits will rise.
Headwind 3: Interest costs on US Debt
The cost to service US debt is going to increase dramatically. This will be the third major force for larger government deficits.
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| Drowning in Debt |
In 2020, the interest rate on a 10-year US Treasury note was 0.32% - less than 1/3 of one percent. Today, the rate on a 10-year US Treasury note is 4.34% - an increase of 4 percent or 400 basis points.
The US cost to pay interest on the existing debt increases continuously. Old bonds mature and new bonds are issued at much higher rates. Every $10 trillon that gets refinanced with a 4% boost, increases the annual deficit by $400 Billion dollars.
This headwind of rising interest costs is made worse, of course, because the amount of debt is increasing at the same time that rates are rising.
Three headwinds and no rainy day fund
What resources are available to pay for the military, to fund recession programs, and pay interest on the debt?
Sadly, we have no rainy day fund. During the sunny fiscal summer that we just experienced, we squandered our bounty by living beyond our means. The white walker of fiscal death lurks just beyond the wall.
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| Winter is coming and we are not prepared |
March 2026 Portfolio Performance
In February 2026, the Dow Jones Industrial Average lost 5.21%, while the Chicken Little Portfolio gained 0.28%. Year to date, Chicken Little has returned 0.71% vs. a loss of 3.26% for the Dow.
March 2026 was a bad month for most asset classes. Gold was the biggest loser with an 11.05% decline in the month. Non-US stocks, and emerging market stocks, suffered with declines in excess of 5% in the month. While the month of March was bad for investors, the year is still essentially flat and the trailing decade still sizzling. No need for bullish investors to change their view for now - hold and expect new highs to come.
March 2026 portfolio position
Chicken Little Portfolio remains 100% in cash. No trades in March 2026. I continue to believe that all assets are overvalued.
Before attempting another bear market shorting attempt, I would like to see a series of closes that are at least 10% off the all-times highs, and then a partial rebound accompanied by some reduction in bearish sentiment (put/call volume down, vix down, oil prices down).
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