Our Significant Headwinds

Don’t be fooled. We are getting hit. There are areas all around us that are racking both the economy and the markets. What used to work, such as plays for appreciation, are in general not working, though of course there are always some exceptions. It is a time, in my view, to look for income and to be extremely cautious in making your investments.

Much of this is being caused by the Fed in their unrelenting battle with inflation. I keep telling them to just stop for a while and let things cool down. There is collateral damage all around us from their unrelenting push.

Forty-six percent of people are carrying debt from month to month, up from 39% a year ago, according to Bankrate.com. Bankrate also says the average credit card interest rate, or annual percentage rate, has reached 24.10%. This is the highest since their tracking began in the mid-1980s. The Federal Reserve Bank of New York has stated that in the last three months of 2022, credit card balances in the U.S. increased $61 billion to $986 billion, surpassing the pre-pandemic high of $927 billion. Then, a new poll by The Associated Press-NORC Center for Public Affairs Research finds 35% of U.S. adults report that their household debt is higher than it was a year ago. Just 17% say it has decreased.

Next, let us consider the real estate markets. There are a record amount of commercial mortgages expiring in 2023, according to the Wall Street Journal. Smaller banks hold approximately $2.3 trillion in real estate debt, according to data firm Trepp Inc. Surprisingly, this is almost 80% of all commercial mortgages held by all of our banks, including our national banks. The Fed’s ever-rising rates are putting tremendous stress on these banks, in my opinion, and they may lead to another round of bank failures.

These higher interest rates have also wreaked havoc on commercial property valuations. Trepp Inc. has also stated that $270 billion of commercial mortgages held by banks will expire this year which is the highest figure on record. For many of these banks the Wall Street Journal estimates that the value of the loans and securities, lent by the banks, is far, far lower than the book value on their balance sheets. According to KBW Research, the median U.S. bank real estate loans account for 38% of their total loan holdings.

You can smell the trouble brewing.

Then, the Prime Rate for most banks has now climbed again and is sitting at 8.00%. Given the refinancings about to come, and the credit quality of many institutions, which is declining with our higher rates, you can see the double-digit loans will be in the offing if - and I say if - a small company or a high-yield company can get a loan at all. These refinancings are going to be a major problem, in my opinion, for both banks and corporations alike.

Finally, there is the country’s debt. The Federal Reserve earned $58.8 billion in 2022, which is down from $107.9 billion in 2021. The Fed’s higher interest rates have significantly raised the amount of money that the Fed places in balances belonging to its depositor banks. Starting last September, these deposits have exceeded the Fed’s income from its balance sheet.

By law, the Fed must send its earnings to the U.S. Treasury after deducting its operating expenses. Now, the Fed has set up an IOU, which is known as a “deferred account.” Basically, this means the Fed will give no more money to the Treasury Department to help pay down our national debt at the present time because of the Fed’s own decisions on interest rates. Consequently, I assert that our debt-to-GDP ratio will continue to worsen, until there is a reversal in the thinking at the Fed.

In conclusion, I state that you can’t adjust the direction of the winds, but you can adjust the manner in which you choose to deal with them.

Original Source: Author

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