If the Biden administration decided to launch airstrikes against Iran and its proxies while the markets are paused for the weekend (February 3 and 4, 2024), how would the world react?
Hard to say.
On the one hand, Monday morning not much would have changed. The United States has been in military conflict all but 15 years since it’s founding in 1776. It’s kind of what we do. Could it be that the equity and debt markets have our bellicose tendencies baked into the buying and selling decisions of each party.
Also, the debt and equity markets react to in large part to Federal Reserve policy and outlook. The old saying, “Don’t fight the Fed” proved to be true in 2022. The Federal Reserve raised rates at historic rates the equity and debt markets both got spooked. In 2023, the Federal Reserve talked about chilling out and everything was sunshine and rainbows. We are still dealing with a dovish Fed and the markets are bustling with people ready to put their money to work.
However, the markets and the underlying economy are bit more complicated and interdependent than meets the eye. Like a car that makes a funny noise, you can ignore that sound and the dashboard lights and drive for many miles before you have an automobile barbeque on the side of the interstate. This is affectionately known as a Car B Q in my neck of the woods.
Like a procrastinating car owner, economists and investors are noticing funny sounds and dashboard warning lights but waiting to see how far this state of affairs can continue. Eventually, institutional and retail investors have had enough of the funny noises and pull the car over for a pause. Perhaps Iranian air raids would be the spark that illuminates all the other issues we’ve been ignoring. Here are some funny noises and dashboard warning lights that we have been ignoring:
- Doom Spending and Loan Delinquency. Financial stress creates a lack of dopamine. Booking a cruise to the Bahamas on a credit card creates dopamine. Rinse. Repeat. Furthermore, credit card delinquency is either at or above pre-pandemic levels and rising. The retail boom is fueled by tomorrow’s money, not today’s tangible dollars. How about Auto Loans?
- Commercial Real Estate Refi Crisis is Looming. Over 2 trillion dollars must be refinanced if commercial landlords want to stay in business between now and 2027. In 2023, many of the refinances were granted extensions. At some point, the banks can not extend and pretend. Hope that rates will fall and prices on properties stay high is all the banks can do. Have you seen empty office buildings, shopping malls and skyscrapers in major downtown areas? I have. These prices can't fall. If they do, these smaller regional banks are upside down. Much like banks in 2008 thanks to subprime mortgages.
- Student Loans are 2008 all over Again. In 2008, Fannie Mae and Freddie Mac were considered government agencies. They weren’t, but wink wink, they were. Their subprime loans were collateralized into securities. And that’s one of the sparks that led the 2008 Car B Q. Now, Sallie Mae (an implied government agency) has made subprime loans to Gen Z and Millennials hoping to make a career out of their $40,000 art history degrees. We’ve collateralized their student loans into securities affectionately called SLABS. I think you know how this movie ends. In other news, The Big Short is a great movie.
- WageFlation Isn’t Happening. There’s this idea that unemployment is low. But that’s not the point. If your job pays your bills, then you are employed. If you have to have several jobs to make ends meet, you are very employed but to what end? CNBC spoke about this in 2021 and it’s gotten worse since. “Over 50 years, the difference is even more striking. After accounting for inflation, home prices have jumped 118% since 1965, while income has only increased by 15%...” Furthermore, the higher paying jobs are disappearing. UPS will lay off 12,000 people from good paying jobs in 2024. Artificial Intelligence will render many jobs obsolete (like blogging).
- Tax Hikes. Across the board everybody is paying more in taxes than ever before. It’s the exact opposite of the stimulus checks. Taxes are de stimulus checks. The better your job, the higher your income the more you penalized and the less likely you are to use UPS to deliver your Amazon junk. The higher the taxes, the lower the GDP.
- Commodity Shortages. The United States is a service and technology-based economy. We import energy and building materials. Much of these imports come from China and the Middle East. In case you were wondering, they are none too fond of the US right now. Furthermore, we are purchasing these goods with newly printed money. Brazil, Russia, India, China and South Africa have banded together to circumvent such tomfoolery. Remember that I told you this:
“You can’t print your way out of a commodity crisis.” The 2020’s are starting to rhyme with the 1970’s.
- The Intangible Bubble. The actual value of the SP500 is not for hard assets. It’s for ideas. When money is easy to get a hold of you can use leverage to buy a lot of stocks. As those stocks go up in value, ideas are more valuable than the things the ideas create. In other words, the recipe for Coca Cola is worth more than a million gallons of the soft drink. That’s fair enough. But 90% in 2020 seems a bit frothy to me. What if the market wakes up to this fact? How much further down would it go to be fairly priced?
Any one of these sparks could set the markets and the economy into a roadside Car B Q.
Or not. Hard to say.
If you'd like to discuss or debate any of these salient and insightful points, let's talk.