Juggling Dynamite

The fourth year of a presidential cycle is all about promising. The first year of a presidential cycle is about trying to deliver on all the promises.

At the start of President Trump’s last term in 2017, the U.S. government deficit to GDP was 3% versus 6% today. The federal debt as a percentage of GDP was 100% versus 130% today. The Fed’s overnight lending rate was 40 basis points then versus 4.75% now. The 10-year Treasury yield was 2.38% versus 4.28% now.

U.S. Household debt (below since 2004), was at $12 trillion in the fall of 2016 and is over $18 trillion now. The U.S. 30-year fixed mortgage rate was 3.57% versus 6.8% now.  In November 2016, the U.S. unemployment rate was 4.7% and downcycling from a 10% peak in October 2009. Today, the US unemployment rate at 4.1% is upcycling from a 3.4% historic low in January 2023. Unemployment has always continued to rise throughout Fed easing cycles. The Fed started this easing cycle only two months ago.

The number of unemployed Americans was falling from 2016 through 2020. Today, the number has been rising again since January 2023. The over 1.6 million Americans unemployed for more than 27 weeks in October, was a rate of change commenserate (red circles courtesy of Global Markets Investor) with the onset of past recessions (grey bars below since 1975).Job posting service ZipRecruiter this week warned of a protracted labour market downturn with falling demand from small and medium-sized businesses. (The companies that borrow money through banks and private lenders).

As Federal Reserve Chair Powell noted yesterday, the labour market has more excess capacity now than before the Pandemic. The unemployment rate, already expected to rise in 2025, will do so at an accelerated pace if the Trump team delivers the government spending cuts it campaigned on.

Last, but not least, Trump is returning to the Oval Office after the largest pre-election valuation ramp for the S&P 500 of any election year of the last century. The price now 22x forward earnings compares with 16x in the fall of 2016 when the dividend yield was 2% compared with barely over 1% now.  Stocks priced an eye-watering 3x forward sales estimates, near double the ratio of 2016, are tied for the all-time most inflated since just before prices crashed in the fall of 2021 and March 2000.Given where we are in this business, debt, demographic, climate and market cycle, whoever came into power at this juncture would have a tough time serving all the free lunches wanted. 2024 is going to be a very tough act to follow.

It looks like the U.S. election is yielding a decisive verdict, and that’s good news. Risky assets like stocks and cryptocurrencies are up sharply on the promise of less regulation and further tax cuts from a Republican-led government.

In less bullish news, the Treasury market continues to sell off, with a rate backup that began in mid-September. The US 10-year yield at 4.45% this morning is up 83 basis points from 3.62% on September 16 and back to the same level as July 1, 2024, and September 2023, before that.

In September 2023, the U.S. consumer price index rate of change (CPI) was 3.7% year-over-year, compared to 2.4% this September. The US Federal Funds rate was at 5.33% versus 4.83% today.

But that’s where the good news ends. Fixed credit rates follow Treasury yields. Yesterday, the benchmark U.S. 30-year mortgage rate was 6.72%, up more than half a percent from 6.13% in September 2023.

Financial conditions have eased further for the largest publicly traded corporations reporting record profits.  However, times are more challenging for the bulk of the economy—households and small businesses—that get their funding through the banking and private lending system.

Something’s got to give. Euphoric pricing in publicly traded corporate securities makes it harder for the U.S. Fed to deliver monetary easing.  The Powell-led Fed wants to ease interest rates for Main Street, but that’s not happening yet.

Eventually, even large public corporations need growing demand from the private sector to keep their revenue and earnings forecasts moving higher. Attaining those targets is now more challenging.

A new CMHC report notes that 1.2 million mortgages are up for renewal in 2025 and 980,000 in 2026. About 85% have fixed rates contracted when mortgage rates were below 2% compared with over 4% today.

Although the Bank of Canada has lowered its base rate from 5 to 3.75% since June, Canadian fixed-term loan rates have risen over the past month as government bond prices dipped, driving up yields/fixed borrowing rates.

In the historically slow season for real estate transactions, a flood of stressed homeowners are putting their properties up for sale. See More than a million mortgage renewals in 2025 could mean a listings surge as stressed owners sell homes they can’t afford.

The trend is particularly evident in private lending, where higher interest rates and less stringent lending standards led to homeowners becoming particularly overextended.