Clear As Mud
Ask most economists about the U.S. economy and there will be no clear answers. On one end we have fiscal stimulus pushing deficits unsustainably and on the other end a hawkish Federal Reserve tightening interest rates, it would appear the government is working against itself.
As the U.S. deficit grows, so does it’s interest expense. As reported in the Wall Street Journal, this current fiscal year, interest on the debt is expected to be approximately $745 billion. The average interest rate on marketable debt went from nearly 5% before the Great Financial Crisis to as low as 1.42% in early 2022. Unfortunately, it is about to cross 3% again and rising quickly. The deficit is clearly out of control.
It is very interesting that 20% of this year’s net new jobs are government hires. Under the Biden Administration, the government has taken a more active role in the economy. For example, the Federal Trade Commission has played a significant role in blocking mergers and acquisitions. If you talk to business owners, they will tell you that this kind of regulation is stifling growth and innovation.
The banking crisis is far from over as “higher for longer” interest rates will continue to erode the bond portfolio values of banks that purchased longer term bonds when interest rates were low. Additionally, banks around the world face issues in their commercial real estate portfolios with office occupancies still nowhere near pre-pandemic levels. This coming year will be one of great difficulty for the banking and real estate industries. Opportunities will abound in this area, but patience is critical.
Higher oil prices continue to hamper the economy and hurt our fight against inflation. OPEC is intent on keeping the oil supply down to keep prices up. Acknowledging these facts, the Biden Administration just reversed course by granting offshore oil leases for the first time. Domestic oil rig count is also down, further demonstrating that the oil independence we had previously has been hurt by the current administration. High oil prices hurt the consumer who is already stretched and embolden our enemies like Russia who rely heavily on oil revenue to fund the war in Ukraine.
With the consumer running out of steam, it does not appear there will be a relief in the price of goods and services in the near term. The government stimulus money that was handed out during the Covid crisis is predicted to run out soon. Additionally, as reported by Goldman Sachs, credit card payment delinquencies are rising and stand over 3.5%, up 1.5 % since their low point.
The United Auto Workers strike shows the power of the unions in this country. Look for car companies to continue to raise prices and lay off workers as they adjust to higher wages which eventually will follow the strike.
Higher prices can be seen everywhere. Mortgage rates have doubled over the last year with the national median home price up 42% since January 2020. Even smaller purchases like streaming services are constantly announcing price hikes.
China’s economy has taken a hit, and it clearly has hurt the confidence in their government. For global commerce to thrive the business community must have confidence in the stability of China’s government and its attitude towards business.
Our view is that a serious slowdown is inevitable. We have consistently argued that this time around inflation would be tough to beat. Thus, our cautious view of the world.
Fortunately, our portfolio of fixed income has maintained very short duration and our multi-strategy funds have performed well in the face of the market sell-off in September.
Keep a close watch on the 10-Year Treasury. If yields continue to climb it could spell more violent swings in the equity market as well as some new bank failures.
We continue to believe that as the year moves into autumn that prudence and patience is dictated in allocation of your resources.
Mark Twain said, “October is one of the peculiarly dangerous months to speculate in stocks. Others are July, January, April, September, November, May, March, June, December, August and February. “
He was right!
As always,
Seymour W. Zises
