Thoughts on The Debt Ceiling, Central Bank Balance Sheets, and Housing in 400 Words (or so)
Let’s start with the good. Housing, which has always been considered a great leading indicator of the economy, may have become a rather lagging indicator. When any entity borrows at a variable rate they are obviously credit sensitive (hurt by higher rates), but homeowners took the painful lessons of the 2008 housing crash to heart as roughly 70% of mortgages are long-term fixed debt at less than a 4% rate. That has led to the “golden handcuffs” issue where people remain in their homes longer than they otherwise would because they are loath to give up such low-cost living. The result is that there is very little existing home inventory, and the 38% spike in home prices nationally since the beginning of the pandemic has only given back a couple percent, on average, and prices in some parts of the country continue to move higher. Housing’s credit insensitivity has been an important factor in why the consumer has held up so well despite the rapid rise in rates and the rapid decline of the money supply. Ultimately, affordability at the worst level since 1979 is going to matter. It’s just going to take a while and it won’t look anything like the GFC.
One pivotal question every investor should ask themselves is: Are global central bank balance sheets going to be higher or lower over the next five or ten years? Money printing has undoubtedly been fuel for risk assets. Last year, Barron’s published a study that argued the correlation was 91%. But can it last forever? If “The Great Moderation”, the several decade period of falling inflation is over, doesn’t that mean that the decades of money printing and competitive currency devaluation globally must be over as well? We have had an epiphanal moment that has informed us that inflation wasn’t dead, but just dormant. Is it not reasonable to assume that higher inflation volatility means less expansion of sovereign debt ratios? If you believe that the correlation of risk assets to global money printing is durable, the long-term inflation outlook is paramount.
Regarding the debt ceiling negotiations, I do not understand all the optimism. I know we have been through this before and we have always gotten through it and eventually I think we will again prior to default, but not before it gets ugly. The equity markets have had a huge week driven seemingly by the idea that this drama will all be over with an “agreement in principle” by Sunday evening. I can’t imagine it will be that easy. I don’t see Speaker McCarthy capable of finding a middle ground that both the majority of his caucus and this President can get behind before we get to the edge of the cliff. We have gerrymandered our way to an inexorably more polarized House. My guess is that we are about to see some of the consequences of doing so.
Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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