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Maybe this is a simulation!

| October 16, 2023

Last week was a crazy week and I wasn’t able to write a blog. Let’s see if we can get caught up with what happened last week, like anything major happened 😊. We’ll look at the truly serious (war) and then take a quick tour around a variety concerning elements in the economy and markets.

In the “news you already know” category, war has broken out in the Middle East. It’s ugly, and it’s probably not ending very soon.

So, in addition to helping our friends in Ukraine, we will now be standing firm in support of our long-standing allies, Israel, in the Middle East. What that will look like remains to be seen.

Did Iran help plan the attacks or not? There seems to be some confusion.

And why is that important? While President Biden says the current wars won’t “overwhelm” the US, there is a chance that Iran could become involved. What would that mean for our involvement? Just for the record, my security clearance doesn’t get me that far in the know, but it would likely lead to something on a much larger scale.

But while we are “helping” with two wars, are we paying attention to the South China Sea? Easy to overlook things there. Do we have enough forces to “help” on three fronts? I’ll let you answer that for yourself. Suffice it to say, there are many things that could spark into something much larger. For now, the markets are taking things in stride.

On a MUCH lighter note, speaking of fires raging, has anybody been paying attention to the dumpster fire that is the Denver Broncos and Russell Wilson? It’s the only thing that could rival the smile on my face from the Washington Huskies beating the Oregon Ducks. Sorry Ducks fans!

Ok, enough controversial stuff!  Let’s get back to economics, because everyone agrees on economics 😊.

Since March 2022, the Federal Reserve has been pulling money out of the system in hopes of slowing inflation. That has certainly worked, but maybe not to the level they think is appropriate. In the process of pulling money out, we now see that the bottom 80% of households have depleted their excess savings. A couple trips to the grocery store can take care of that these days!

My guess is if you parse the upper 20% of households, you will see that really only the top 5% are contributing to that excess savings money. That’s just a guess, but I think a pretty good guess.

On top of the savings being spent, now student loan payments are required again (after a very long pause).

Meanwhile, according to the National Association of Realtors, housing has never been less affordable.

This is largely due to mortgage rates that haven’t been this high since before the Tech bubble.

Treasuries are now as cheap versus equities as they were at the 2021 peak, but still below the Tech bubble valuations.

And as the Federal Reserve begins its slowing of rate hikes, history shows us that the average time between the last rate hike and the first cut in rates is eight months. Of course, that’s extremely variable, as it ranges from four months to 18 months (chart below). If the over/under is eight months, I’m inclined to take the over this time around. How about you?

So, rates are at highs we haven’t seen for decades, valuations are high (but not extremely high), and the average person is saddled with debt from credit cards, auto loans, and home loans (and now throw on that the student loans). Seems like a perfect time to continue tightening credit and pulling money from the economy – right?

And from the ‘You can’t make this up’ division of the weekly blog. I will be honest with you; I apparently didn’t pay attention to the details of the ‘Fiscal Responsibility Act of 2023’ (I want to be on the legislation naming committee!). As part of being “fiscally responsible,” the House of Representatives included a complete suspension of the debt limit until Jan 1, 2025. Because what could go wrong!? Oh, but wait, there’s more. Here’s what has happened to the debt since the limit was suspended.

$2 trillion has been added to the debt since the end of the first quarter, with the national debt being over $33.5 trillion and growing fast.

But Chris, it’s ok to have that much debt because the United States is the reserve currency and we own a printing press. Well, maybe. But what happens when China, Japan, and many other countries stop buying your debt? What about when institutions and the public stop buying your debt? Here’s what happens.

Primary dealers have to buy the debt. Not because they want to, but because they HAVE to. Otherwise, they get kicked out of the club. So last week Primary dealers had to buy 18% of the 30-year Treasury auction, versus the standard 10%. Is that as bad as it gets, or will it get worse? I have my opinion, but I will let you make up your own mind.

That’s about it for me today. The programmers are pulling the plug before you all see the matrix.

I hope you have a good week and feel free to reach out with questions or an extended conversation, we would all be happy to have one.