How long can Wile E. Coyote run from his debts?
By Stan_DV8Two facts:
- US Gross National Product grew at 4.9% in the 3rd quarter,
- US employment rates remain at some of the highest levels in recent history. Most people who want a job, have one.
Some other facts:
- US consumer credit card indebtedness ($3-trillion) has never been higher.
- Mortgage rates are at highs not seen this century.
- Commercial real estate defaults are rising and predicted to continue
- US corporations face a “wall of debt maturity” and will need to refinance at much higher rates.
How do we reconcile these apparently conflicting pictures?
Jim Grant, of Grant’s Interest Rate Advisor, is of a generation who do not speak in exclamation marks and hyperbole. So parse his words when he says “the protracted sell off in Treasuries is properly raising concerns that the March regional banking crisis never ended but only took the summer off. All time low interest rates beguiled, seduced and even coerced people into doing things they would not otherwise have done…” [emphasis added]
He went on to make the point that the threat is not just the higher current interest rates, but that such a quantity of debt was taken on at very low interest rates, which is going to have to be refinanced. It’s not just that interest rates have risen, it's that they have risen so fast, and that so many people, corporations, banks are not ready for the shock. The example of the latter is the spectacular detonation in March of Silicon Valley Bank, whose leaders behaved exactly like meme stock yoloers.
So perhaps our 4.9% growth economy is like the cartoon scene where the hare zooms off the edge of the cliff and hangs momentarily in space until gravity gets a grip on him.
Why are we spending like gangbusters?
Humans can sometimes teach themselves to plan long-term, but we all feel short term. Surviving a pandemic is emotional, celebrating life is a reasonable response. In Covid, the government gave people free money for a while. Nobody could spend it. We came out of Covid with lockdown fatigue, a feeling of having dodged a bullet, and extra money. So we went on a giant spending spree. When the cash ran dry, we seem to have happily pulled out the credit cards. Didn’t we see the threat of inflation? A (contested) theory called the money illusion may explain that.
Personal Savings Rate:
Also, I blame the sudden high visibility of billionaires. We all want to be billionaires now and, considering some of the idiots that are, it seems like a viable expectation. But we want to skip the tiresome business of earning that money, and go straight to the Gulfstream IV part of billionairing. But we can’t, so we pretend. This year, the luxury goods company LVMH (LouisVuitton, Moet, Hennessy) became Europe’s first $500-billion company.
Other borrowers: Corporations, banks and the US government
US corporations are in no better state. Bruce Richards, CEO of Marathon Asset Management, told Bloomberg (10/31/23): “The corporate sector isn't quite as stressed as commercial real estate. But when you look at high yield and loans, the highly levered companies, their downgrades are running two to one in the next quarter (fourth quarter) and first quarter of next year. We expect the default rates to really start to spike upwards so we can see that doubling in the next six months.” [emphasis added]
Banks: You just never know with banks, as we found out in March this year. The actual math should be pretty simple (borrow short, lend long), but as a Bloomberg columnist recently noted, things have gotten a lot harder now that the traditional relationship between banks and their long-standing, stable depositors, has broken down. “If the relationship aspect doesn’t work anymore, then banking really is just extremely fragile,” he wrote. “Without the relationships, banks are just highly levered investment funds that make illiquid, risky, hard-to-value investments using overnight funding. That can go wrong in lots of ways!"
Here’s an FDIC’s chart from earlier this year, showing the banking industry’s unrealized losses on investment securities in 2022.
Those numbers are almost certain to be higher this year. Reuters recently reported that Bank of America alone had unrealized losses of $131.6 billion on securities in Q3, up from Q2.
The US Government
On October 31, Richard Fisher, a former head of the Dallas Fred, told CNBC that government borrowing levels have gotten “horrendously large.”
The government is the biggest borrower of the lot, of course, which brings us to the two wars that have embroiled the U.S., the cost of them, and the daunting outlook. What’s now unfolding in Gaza and Israel is not confined to those countries. Some US students are afraid to venture out on their own campuses; there are massive protests (on both sides) from Brooklyn to London and across the world, while in Dagetsan, Russia, a mob went hunting for Jews.
The world outlook is very volatile at the moment – it’s just not a good time to be out of liquidity.
Summing up, this tweet seems to capture the overall picture:
In markets, the hit comes not when some data is published, or some externality actually occurs; it comes when investors suddenly all come to the same conclusion about what it means.
If you think we’re out over the edge of the cliff with only an air pocket beneath us, this is where you trade on Kalshi:
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