Market and Economy
Diligence is the mother of good luck
Benjamin Franklin
Video: Financially Stretched Consumers Set to Cut Back Spending
• We are avoiding retail stocks like Amazon (AMZN), Target (TGT), Lowe’s (LOW) and Wayfair (W).
• Also avoiding consumer discretionary stocks like Tesla (TSLA), Carvana (CVNA) and consumer finance stocks like Capital One (COF), Discover (DFS) and Affirm (AFRM).
• Over 51% of Americans now carry a balance on their credit cards each month, a 27% increase since 2018.
• As of October, 28.9% of banks reported tightening standards for consumer lending, a leading indicator of potential recession.
• Delinquency rates across all non-mortgages have surpassed pre-pandemic levels, with a sharp increase observed in the September quarter, particularly among younger consumers.
• Student loan pause added $260 billion in consumption, accounting for up to 0.8% of monthly consumer spending. The pause ended on September 1.
• The average interest rate on credit cards has soared to 20.72%, with rejections for scores under 700 hitting over 50%.
Financially Stretched Consumers Set to Cut Back Spending
• We are avoiding retail stocks like Amazon (AMZN), Target (TGT), Lowe’s (LOW) and Wayfair (W).
• Also avoiding consumer discretionary stocks like Tesla (TSLA), Carvana (CVNA) and consumer finance stocks like Capital One (COF), Discover (DFS) and Affirm (AFRM).
• Over 51% of Americans now carry a balance on their credit cards each month, a 27% increase since 2018.
• As of October, 28.9% of banks reported tightening standards for consumer lending, a leading indicator of potential recession.
• Delinquency rates across all non-mortgages have surpassed pre-pandemic levels, with a sharp increase observed in the September quarter, particularly among younger consumers.
• Student loan pause added $260 billion in consumption, accounting for up to 0.8% of monthly consumer spending. The pause ended on September 1.
• The average interest rate on credit cards has soared to 20.72%, with rejections for scores under 700 hitting over 50%.
Video: Inflation Eases, But Are We on the Brink of a Debt Disaster or a Consumer Recession?
• Core CPI has slowed to 4.0% year-over-year.
• Unexpected inflation is somewhat beneficial for the federal deficit, which is critical given the nearly $1.7-2 trillion deficit and the $34 trillion existing debt.
• Consumers face challenges with rising credit card delinquency and upcoming student loan payments, potentially leading to a weaker 4Q23 in GDP terms
• In the September quarter, government spending was a major component of economic expansion.
Economic and Market Review October 2023
Economic and Market Review October 31, 2023 Equity Indices YTD Return Dow Jones -0.28% S&P500 9.23% NASDAQ 22.78% MSCI – Europe 1.38% MSCI–Emerging -4.31% Bonds Yield 2yr Treasury 5.07% 10yr Treasury 4.88% 10yr Municipal 3.64% U.S. Corporate 6.08% Commodities Price Gold $1992/oz Silver $22.96/oz Crude Oil $81.36/barrel Currencies Rate CAD/USD
Video: Interest Rates are Confusing Investors. 5% Yield for the 10 and 30 Year US Treasuries. What Now?
• The Federal Reserve influences short-term interest rates through the FFR (Federal Funds Rate) which currently sits at 5.33%.
• Short-term rates affect long-term interest rates over time by impacting borrowing costs, economic activity, and inflation, which in turn affect nominal GDP.
• In a Nominal GDP environment of 6% growth, a fair yield for 10 and 30-year Treasuries is historically around the 6% mark.
• With a federal deficit of nearly $2 trillion annually, interest expenses will be near $1 trillion as rates adjust upwards, and supply of bonds surge.
• QT makes the Fed a net seller of bonds.
• Concerns about sanctions and a ballooning US budget deficit are leading global buyers to reduce US dollar and treasury holdings, favoring gold or other assets instead.
Video: US Treasury Bonds Have Crashed — Is It Over? TINA is Dead.
Bills, bonds and notes are now a reasonable alternative to stocks as they approach or break 5% yield. TINA, or “there is no alternative” to stocks, is dead. Typically when interest rates spike stocks go down, but this has not happened over the past 8 months. Now that the Fed has stopped being the top buyer of treasuries, we think interest rates are likely to move higher still to around nominal GDP (around 6%). Long-term interest rates dictate P/Es. Stocks, in our opinion, are vulnerable, especially if interest rates continue higher.
The Dollar’s Dilemma: BRICS, CIPS, and the Global Quest for Alternatives
• Developing nations are increasingly interested in trading systems not tied to the USD (US Dollar).
• In response to the weaponization of the dollar SWIFT payment system, countries are developing alternatives like China’s CIPS, which are gaining traction.
• Confiscation of Russia’s dollar reserves as punishment for the invasion of Ukraine has accelerated the decline of the dollar as a reserve asset.
• Gold as a global central bank reserve asset is increasing with the developing world leading the way.
• Conversely, the USD is losing share.
Economic and Market Review September 2023
Economic and Market Review September 30, 2023 Equity Indices YTD Return Dow Jones 1.09% S&P500 11.68% NASDAQ 26.30% MSCI – Europe 5.39% MSCI–Emerging -0.38% Bonds Yield 2yr Treasury 5.03% 10yr Treasury 4.59% 10yr Municipal 3.44% U.S. Corporate 6.23% Commodities Price Gold $1864/oz Silver $22.39/oz Crude Oil $90.77/barrel Currencies Rate CAD/USD
Aging Demographics and Medicare Advantage Growth Heal Outlook for Healthcare Sector
• On a secular basis, a demographic shift toward an older population has tailwinds in care needs and individual spending per visit. Medicare Advantage (Medicare Part C) will grow to become the largest payor by 2026.
• Healthcare is recession-resistant, with the largest payors, Medicare and Medicaid, being price agnostic toward care.
• A concentrated effort in the sector to expand margins through rate increases, cutting administrative costs, and reducing contract labor.
• US spending on healthcare will grow at a 7.1% 5-year CAGR – outpacing GDP by an estimated 240bps.
Economic and Market Review August 2023
Economic and Market Review August 30, 2023 Overview Congress is spending the bulk of September deliberating over the Federal Budget for fiscal year 2024 as a looming deadline on September 30th approaches. Should an agreement not be reached, then a government shutdown could occur. The $6.9 trillion proposed budget encompasses
Video: Fed’s Jackson Hole Reveals US Government Fiscal Deficits are Unfixable without Unexpected Inflation
Powell reiterated that 2% inflation is the Fed’s (The Federal Reserve) target, with inflation currently running closer to 3% headline and 4% core. Fed governor’s concur with Powell, putting their line in the sand at 2%.
Gold’s Resurgence in a De-Dollarizing World
• China/BRICS is actively working to reduce global trade’s dependency on the US Dollar, settling international agreements in their currency, the RMB.
• The US faces numerous economic problems, from the credit rating downgrade to ballooning debt and an aging population.
• Central banks have significantly increased their gold purchases, with a 152% year-over-year increase in 2022, primarily driven by countries like China and Russia seeking to move away from the US dollar.
• Gold has been a historically stable value asset, now being one of the only options now that Treasuries are falling out of favor internationally hinting at its potential to reach unprecedented price levels.
