As October rolls in, the air is filled with suspense and the unexpected, perfectly symbolized by the recent unsettling events in our world. The October 7 incursion by Hamas on Israel, accompanied by the Israeli government’s declaration of war, has certainly added to the atmosphere of uncertainty. But what other surprises does the month hold for us?
In our view, the economic performance of the United States, alongside its financial markets, over the upcoming six months will be heavily influenced by consumer price inflation, interest rates, and oil prices. The emergence of a new conflict in the Middle East could significantly affect these vital economic factors.
It’s important to note that the extensive money printing that commenced between 2020 and 2022 has not truly ceased. While the Federal Reserve has raised the federal funds rate by 5.25 percent and made small reductions in its balance sheet—from $8.9 trillion to $7.9 trillion—the federal government continues to engage in excessive borrowing and spending. This fiscal year, the U.S. experienced a staggering deficit of $1.7 trillion, translating to over $4.6 billion in daily borrowing and spending. Continue reading
“When interest costs escalate here in the United States, we find ourselves in a vicious cycle. Higher interest rates lead to increased funding expenses, which necessitates further debt issuance, leading to bond liquidation, which in turn drives rates even higher, thereby placing us in a precarious fiscal situation.”
– Paul Tudor Jones, October 10, 2023
Feeling the Pinch
The struggles of an over-leveraged economy in the face of rising interest rates are extensive and, regrettably, predictable.
Simply put, as interest rates climb, the cost of borrowing money increases.
The impact can be clearly observed in the realm of car loans. Presently, the average monthly payment for a new car exceeds $750, with interest rates hovering around 9.5 percent. Alarmingly, approximately 17 percent—roughly 1 in 6—of new vehicle loans incur monthly payments exceeding $1,000.
Additionally, securing a mortgage has become starkly more expensive, with the average rate on a 30-year fixed mortgage now around 7.65 percent, compared to less than 2.65 percent just a few years ago. Continue reading
While Schlitz beer has long been regarded as less than desirable, it did have a moment in the spotlight when priced appropriately and serving its intended purpose. The evolution of capital experiences a cycle of creation, consumption, and destruction, marked by various fluctuations.
Wealth can be built throughout generations, but it can also be rapidly squandered. A person’s skills, knowledge, diligence, and character often dictate whether they are contributors to wealth or merely consumers. The most crucial aspect, however, is how individuals adapt to their unique circumstances.
A July 21, 2014, article in Forbes Magazine detailed the Stroh family’s remarkable journey from brewing dominance to their sudden fall from grace. Titled, How to Blow $9 Billion, it began with the tragic note:
“The Stroh family took over a century to build the largest private beer fortune in America, yet it only took several poor decisions to lose it all.” Continue reading
In the height of the coronavirus crisis, on April 10, 2020, Minneapolis Fed President Neel Kashkari made a notable appearance on 60 Minutes. His wide-eyed declarations revealed a defining perspective.
Kashkari asserted that the Federal Reserve has “infinite cash” and would take whatever measures necessary to ensure liquidity within the banking system.
However, he overlooked a crucial point: the introduction of infinite cash ultimately reduces its fundamental value to zero. By 2022, the impact of this approach had driven consumer prices to heights not seen in four decades.
While cash continues to have value, it is significantly diminished compared to three years ago. According to the Bureau of Labor Statistics’ inflation calculator, the dollar has lost nearly 20 percent of its purchasing power in that time frame. In reality, many consumers feel that this decline is even more pronounced.
This means that workers who have not received a 20 percent wage increase since 2020 are, in fact, worse off today than they were three years earlier. Indeed, numerous changes have occurred during this period. However, we suspect that most workers have not managed to earn a 20 percent raise since 2020. Continue reading
