The turkey's not the only thing getting stuffed…
The economy and markets can't take on much more debt without getting sick.
… the capacity to finance skyrocketing public debt is too. Everywhere I go in my travels, this comes up. Amid the run-up in short-term rates and yields to multi-decade highs, the U.S. government’s funding costs have emerged as a critical issue. Financial markets got a taste in August, when Treasuries sold off sharply and yields shot up on bigger-than-expected quarterly Treasury issuance. This is partly due to budget deficits running far above where they should be at such a stage of the cycle (about 8% of GDP). But Gakeval Research also puts the onus on Treasury for having failed to extend the duration of its debt when interest rates were low. Now, it’s having to roll over at least $1 trillion, if not more, every single quarter for the coming two years. And it could get worse. Piper Sandler thinks the deficit, which hit $1.7 trillion in fiscal 2023, will exceed Congressional Budget Office projections over the next several years. A likely recession at some point, the extension of the Trump tax cuts no matter who is in charge and a Pentagon that is going to need more money will add fuel to the fire of burgeoning entitlements. Election-year politics, too. Rare is the incumbent who doesn’t turn on the fiscal spigots to juice the economy in an election year. Should the economic backdrop visibly deteriorate, it’s not hard to imagine a ’70s’ rerun of high inflation and high rates. No winners in that scenario.
My final meeting in Miami last week was a panel discussion (after a tour which featured hundreds of millions of dollars before our eyes!) at the Miami branch of the Federal Reserve Bank of Atlanta. The Regional Executive on our panel emphasized the Fed is keen on avoiding the mistakes of the ’70s and will hold higher for longer until at least 2.5% core PCE. The audience of financial planners was filled with questions and opinions. Why, this discussion could’ve gone on for hours! These lifelong Floridians are uniquely suffering the influx of daily new residents, the housing boom and doubling of numerous property-related taxes which are pushing homeowners out of their family homes. A booming deficit that worsened under both Trump and Biden only adds to the pressures on the Fed. Neither are likely to propose policies to make it better if they win next November and in fact, both have vowed not to cut Medicare and Social Security, the biggest government outlays. Whomever is elected, Piper wonders if the government can borrow at the risk-free rate for the next five years if investors know with confidence the president won’t prioritize putting the country on a sustainable fiscal path. An unprecedented $8.2 trillion of U.S. government debt will be maturing in the next 12 months, a third of total Treasuries outstanding! That is 3.5 times more than what was on net issued so far this year!!! And you can add another $2 trillion to that total to cover the projected deficit for the new fiscal year that began in October. It’s estimated the nation’s increased debt service burden arising from all this red ink will gobble up 20% of all government revenue by 2033, exceeding what’s spent on defense and Medicaid. Higher for longer, longer.
But hey, it’s Thanksgiving week. Yardeni Group thinks it best to put off worries about the budget deficit until after next year’s election. It’d rather look at some positives. For example, China’s weak economy, which lessens the likelihood of a geopolitical conflict over Taiwan and should keep oil prices—and thus global inflation—somewhat restrained. In the markets, Oppenheimer sees the potential for further upside surprises, led by regional banks. It’s become encouraged about similarities to the industry’s 2020 bottoming pattern and thinks a similar banking breakout could catalyze a long-awaited broad-based breakaway. Been hints of such in recent days, with small caps rising from the floor and defensives getting a strong bid. Still, with the market now pricing four quarter-point policy cuts in ’24, Wolfe Research wonders, “How long will ‘bad news’ be viewed as ‘good news’?” It’s worried consensus is not expecting a single quarter of negative real GDP growth next year, and that S&P 500 operating EPS growth is projected to reaccelerate to a double-digit pace. It believes this view underestimates the historic lagged impact of rate hikes, which take roughly 18 months for full effect. We’re just at month 12. So, aren’t we kind of still in the middle of woods then? But for right now, I can’t get the smell of cooked turkey out of my mind. So, I’m following Yardeni’s lead and focusing on the good. Below are some fun tidbits in lieu of this week’s macro data (it was a thin docket anyway). Happy Thanksgiving!
Thanksgiving tidbits
Fishy The human attention span has now dropped to only 8 seconds, below that of a goldfish, Bank of America shares.
Open wide! 71% of millennials would rather go to the dentist than visit their bank; 53% would rather lose their sense of smell than their smartphone.
Take a bus Seeking to drive down rents and combat climate change by encouraging more housing near workplaces, Austin is abolishing all parking requirements for new developments. The new policy applies to any housing, office or retail project within city limits.
The Jetsons At a recent conference on artificial intelligence, Bank of America learned that flying cars are coming by ’24 to Paris (where they’re holding the Olympics next summer, more below) and that there’s already been 15.5 billion (!) AI-generated images (and that’s the ones we know!).
All will be well Amid surging corporate interest in AI investment, companies that Goldman Sachs strategists have identified as direct beneficiaries of AI have revised their ’24 capex expectations 28% higher. It expects AI-related investment to boost capex growth by three-tenths of a percentage point next year, making for meaningful upside risk to the long-run capex outlook.
I call hogwash on this one Jefferies shares a recent study that discovered serial snoozers perform better on arithmetic equations and memory exercises than people who got up after only one alarm.
Get your popcorn ready Beyond the usual Santa Claus rally, stocks could get an added year-end boost in ’24 thanks to the presidential election. That’s because policy uncertainty tends to rise throughout election years and peak at election time. Stocks tend to produce higher returns following spikes in policy uncertainty.
Cold War regardless Despite modest progress at the Biden-Xi summit, the U.S. and China are in an economic Cold War, meaning tariffs will remain in place and restrictions on what China can buy and invest in, and how U.S. business can invest in China, likely will tighten incrementally whether Biden, DeSantis or Haley wins, 22V Research says. If it’s Trump, the changes won’t be incremental.
’70s redux U.S. housing affordability is at its worst in 41 years, fueling rental demand as renters locked out of ownership have few options. It’s not just in the U.S. Among G20 countries, only Japan, Italy and Spain have ratios of home prices to income below historical averages.
Hosting the Olympics is pricey Engineers in Paris are rushing to build a giant underground tank to help clean the Seine so athletes can compete in the river during swimming and triathlon events at the Olympic Games, which kick off in late July ’24.
Or you can just diet and exercise The global wellness market reached $5.6 trillion in 2022 and is expected to grow 57% to $8.5 trillion by 2027.
I’m thinking of pumpkin pie right now, actually There’s a fruit—black sapote—native to Central and South America that tastes like Chocolate pudding.