Mountains of Debt Need to Be Addressed

Not much has changed in the past month to convince the markets that the Fed is completely done with the business of raising rates.

This past week’s inflation and retail sales data, chip-sector theatrics and a host of industry conferences did little to change that. In fact, all it did was to raise the level of handwringing coming into yet another pivotal Fed meeting this week.

It would be nice to focus on end-of-the-quarter window dressing, fourth-quarter seasonality, a most certain Fed pause on rate hikes and what should be a pretty bullish third-quarter earnings season.

But the market landscape bears some element of caution for the very near term. Bond yields are grinding higher as Treasury auctions see weak demand, oil prices are trading above $90/bbl, the United Auto Workers strike shows very wide divisions among union leaders and management, both the former and current U.S. presidents are ensnarled in political investigations and the European Central Bank (ECB) is raising rates. Plus, Taiwan Semiconductor told its suppliers to delay shipments, and Congress appears to be on track to trigger a government shutdown on October 1, 2023, because it is not expected to pass the 12 appropriations bills that fund government operations before the start of the new fiscal year.

Should anyone be surprised that traders and investors hit the revolving doors in last Friday’s session? To say America has large numbers of unqualified people in high places is a major understatement. The high-profile diplomatic trip to China by U.S. Secretary of Commerce Gina Riamondo and Treasury Secretary Janet Yellen resulted in nothing of lasting worth. Upon returning, to just kick up some dust, China announced new restrictions on iPhones for government workers.

On the home front, Congress faces yet another budget deadline by Oct. 1, and once again, there seems to be no regard for fiscal responsibility. The Federal debt is just spiraling higher, with the latest Treasury auctions being met with softer demand, implying real rates will remain higher to attract buyers of U.S. debt that currently stands at over $32 trillion, the equivalent of almost $100,000 per U.S. citizen. Elected politicians have a blind eye as to if and when the bond market might revolt.

Outside the country, Xi, Trudeau, Lagarde, Putin, Zelinski, etc., all pose macro, geopolitical and moral threats to whom they oversee. And this is just a very short list that doesn’t even get into the oil markets, where the United States has little if any leverage in bringing prices down against OPEC+.

I note European Central Bank President Christine Lagarde because, last week, she ordered the seizure of mobile phones of her fellow policymakers at the ECB’s policy meeting and rebuked them for leaking crucial information ahead of a policy decision, two sources told Reuters. The unprecedented move is the boldest step that Lagarde has taken to stop information leaking out from the Governing Council, an issue that has plagued her presidency as well as that of her predecessor, Mario Draghi.

How silly and yet surreal. Anyone with clout has at least two separate mobile phones with separate accounts. Just as a follow on, the 26 members of the Governing Council were told to hand over their mobile phones on Wednesday, the first day of the meeting, as policymakers were about to pick Claudia Buch as the ECB’s top banking supervisor, who oversees over 100 of the eurozone’s largest banks, sources familiar with the matter said. So, what’s the big secret? They voted on a watchdog. No one cares. Imagine if the Federal Reserve conducted their policy meetings this way?

This is the kind of stuff the makes everyday investors cringe. It shows a lack of trust and spirit of cooperation at the top of governing bodies both here and abroad to get the right things done. To be frank, I’m surprised much of the time that the market trades as well as it does considering the incredible vacuum of integrity and leadership that exists on both sides of the U.S. aisle and that of the world’s most important foreign powers.

Additionally, there is little mention of how Americans are piling on revolving debt at a meteoric pace. While bankers and the financial media claim that U.S. household balance sheets are healthy, the hard data would argue otherwise.

Outstanding auto loans in the United States are nearing $1.6 trillion, up 14-fold from 1980 and an obscene number considering we’re talking about a rapidly depreciating asset. This number is easily explained when the base price for a 2023 Rivan pickup is a  $73,000. Car loans now extend out to 96 months (eight years). A 96-month loan with a 5% interest rate with 10% down ($7,300) commands a monthly payment of $1,048 and will cost over $100,000 by the time the last payment is made. I think this borders on insanity, but I don’t make the rules, and it’s a free country. However, it’s a red flag type of chart.

On the plus side, according to Investopedia, “Home equity in the United States is at an all-time record, with the average mortgage holder now owning $185,000 in accessible home equity. That figure increased by 35% in 2021, fueled by a similarly rapid increase in house valuations. This is the fastest rate at which average U.S. home equity has ever grown — more than twice the rate of 2020, the previous high. Clearly, the spike in home appreciation created an opportunity to tap home equity, but it does not resolve the personal, auto and student loan credit bubbles that are being serviced with interest rates at 15-year highs.

The largest form of consumer debt in the United States is mortgages, totaling $12.04 trillion in the first quarter of 2023. Student debt is the second largest type of consumer debt at $1.77 trillion, followed by auto debt and credit card debt noted above. The student loan repayment pause was stopped on June 30, 2023. No wonder there’s a labor movement going on in multiple industries. Americans have some big bills to pay.

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