1. Debt Ceiling Cometh
Pay attention.
Economists forecast America will hit its debt ceiling possibly as soon as early June. I expect this highly politicized issue to get dragged out and weaponized by both parties. Even if everyone has the best intentions, it still requires a lot of negotiation before an agreement to raise the debt ceiling is made.
Markets hate uncertainty. The charts below - especially the one showing CDS prices - indicate the markets are starting to anticipate a struggle.
2. Real Estate Under Pressure
Construction spending is an on-the-ground indication of real estate market activity.
The two charts below show that building materials orders are falling.
Simultaneously, property values are declining, as indicated by growing write-downs and declining rents. Declining values and affordability are pressuring homeowners, with foreclosures rising significantly in some regions of the US.
Incidentally, declining rents should ease pressure on CPI over the coming months.
Many analysts expect commercial real estate to be the catalyst for the next crisis. I don’t think the leverage exists for a re-play of 2008-2009, but it wouldn’t surprise me if commercial real estate companies - and lenders - get dragged through the mud for a while.
3. Where are We in this Bear Market?
After recovering from the fall 2022 lows, the S&P 500 is now only down 13% from its all-time-high.
This doesn’t necessarily mean the worst is (or isn’t) behind us, but it’s quite interesting to observe the manic-depressive reaction to daily market news. Some might argue that -13% isn’t anything to panic over.
I think the market mood is reacting strongly to a coalescence of negativity around the world: markets, war, inflation, job losses, the environment. Now people are waking to the news they could be made obsolete by AI in the near future.
I do believe investors must pay close attention to developments in AI. While AI is likely to threaten jobs and put downward pressure on wages for everyone, it could also make the owners of such technology very rich. Productivity and profitability should rise dramatically via automation, benefitting shareholders.
Of course, its possible the real market panic is ahead of us. It can take a long time for bear markets to play out.
The chart below layers previous bear markets to show the typical sequence of milestones. By many measures, we are still in early innings.
4. Did You Know?
This is the first time I’ve seen the US dollar displayed this way.
We’ve all seen charts showing the dollar has lost 97% of its value over the last 150 or so years. These charts are used as an argument against fiat currency debasement.
However, the chart below adds in the growth of that dollar had it received interest income (as one typically does when they hold a currency). With this additional consideration, that dollar actually appreciated over the past couple centuries.