The US economy is on a knife edge, and being the world’s largest economy, this is likely to have implications beyond its sovereign borders.
In a little over one year, the Fed has raised rates to 5.25%, that’s twelve rate hikes since the Fed implemented tight monetary policy, which the Hawkes advocate as a solution to high inflation.
The economy is on a knife edge, with a staggering 37% of Americans lacking enough money to cover a $400 emergency expense, up 32% in 2021
The world’s largest consumers are skint, which translates to less household consumption and declining imports.
“In a little over one year, the Fed has raised rates to 5.25%”
Logistic companies are struggling as the economy is on a knife edge
With fewer goods moving in the economy, logistic companies, a bellwether of the state of the economy, are struggling. Truck freight volume and spending collapsed during the second quarter.
Already cash-strapped US trucking company Yellow has recently ceased operation and is filing for bankruptcy.
But the US in a recession is also a tailwind to the ballooning trade deficit.
Cash-strapped households and businesses demand less imported goods.
So the US trade deficit narrowed sharply, with the Trade deficit contracting 4.1% to $65.5 billion in June.
U.S. imports of goods have tumbled 13% from a record high in March 2022.
Exports slipped a scant 0.1% last month to $247.5 billion.
“Cash-strapped households and businesses demand less imported goods”
The US shipped less oil and fewer pharmaceutical drugs.
The trade deficit with China fell $2.1 billion to $22.8 billion in June and is on track to be much lower compared to a year ago.
A reduction in the trade deficit is bullish for the US dollar. Why?
Less currency is sold on the foreign exchange to buy foreign currency to pay for the imports.
With the economy on a knife edge, the public deficit is worsening as tax receipts decline
US state and local governments experienced the worst decline in income tax revenues ever recorded.
It was the second steepest year-over-year percentage decline in history, with only the GFC having a worse outcome.
In a recession, tax receipts typically fall with declining economic activity.
Federal tax receipts are dropping again, now at recessionary levels and approaching -10% on a YoY basis.
“With rapidly rising interest rates, monthly costs for new homebuyers are almost 20 per cent higher than they were a year ago” – Win Investing
Rising unemployment is further evidence of an economy on a knife edge
Don’t believe the spin that employment is the bright spot in the economy, bearing in mind over a third of Americans can’t afford $400 emergency expenses.
The US lost 585,000 full-time jobs last month, with a wave of tech job losses in the first half of 2023. “Job openings fell to their lowest level since April 2021, but there is still a large gap between the long-term average level, or one consistent with slack in the labour market,” wrote Oxford Economics economist Matthew.
The job cuts keep coming.
CVS Health said Monday it is cutting approximately 5,000 jobs to focus more on healthcare services for its customers.
The move, which is supposed to help the company save money, will affect workers primarily in corporate jobs, the Wall Street Journal reported.
The economy is on a knife edge and the real estate bubble is primed to burst
With rapidly rising interest rates, monthly costs for new homebuyers are almost 20 per cent higher than they were a year ago. Real estate is a highly leveraged market, so when the cost of credit shoots higher, that can potentially crush the market.
The monthly cost for a potential homebuyer has surged nearly 20% compared with a year ago as prices remain elevated, according to new data.
During the four weeks ending July 30, the monthly mortgage payment for the typical US homebuyer sat at $2,605, 19% higher than the same period a year earlier, according to Redfin.
“the Fed could have reached a consensus that enough collateral damage to the economy is already underway, and it may be time to pivot” – Win Investing
Spiralling delinquency rates suggest the economy is on a knife edge
The delinquency rates for commercial real estate mortgages are skyrocketing.
The delinquency rate of commercial real estate mortgages on office properties securitized into Commercial Mortgage-Backed Securities (CMBS) spiked to 5.0% by loan balance in July, up from a delinquency rate of 2.8% in April, having now spiked by 2.2 percentage points in three months, which is by far the worst three-month spike in the data going back to 2000, and by 3.4 percentage points so far this year, also the most sizable seven-month spike according to Trepp, which tracks and analyzes CMBS.
So it is no surprise that Moody’s has cut the credit ratings of ten US banks and warns six more could face a similar fate. But the firm insists ‘the US banking system is NOT broken’.
With the economy on a knife edge, where are the investor opportunities?
If the Fed continues to tighten in a bust, the overtightening could tip the economy into a depression. In this scenario cash is king since when liquidity is tight there are opportunities to buy assets at deep discounts.
But the Fed could have reached a consensus that enough collateral damage to the economy is already underway, and it may be time to pivot.
In other words, central bank tightening could have reached a trough, and that is often the best time to start building a position, preferably averaging into risk assets.
The last rate hike typically marks the beginning of the next secular bull market in stocks. Risk credit and junk bonds also offer investors high-risk high rewards and perform better when the Fed starts loosening monetary policy.
The economy on a knife edge could mean the Fed pivot is nearing, and if so, that would be bullish for stocks
But the wild card is the escalating war in Europe.
War is inflationary, and it leads to supply disruptions.
So a deteriorating geopolitical landscape leading to a widened war could dampen investors’ demand for risk assets, even if the Fed pivots.