Soft Landing…To The Moon

Issue 322

By Jeffrey Trusheim, Chief Financial Officer, Mortgage Solutions of Colorado, LLC DBA, Mortgage Solutions Financial.

Mortgage Solutions presents Issue 322 of Market Pulse. This commentary will provide Trusheim's perspective of the economic, political, and technical considerations that will have an impact on the global & domestic financial marketplace. The report will provide a recap of the previous week's activity as well as a look at the important market-moving factors in the week ahead.

There is an old market axiom that has been around for many years, that I have used in previous missives to make a point: Don’t confuse the two.

The stock market is not the economy, and the economy is not the stock market.

The economy has many of the traditional recession indicators flashing red. The yield curve inversion, with the 3-month T-Bill yielding 134 basis points above the 10-year Treasury (5.37% vs 4.13%) has a 100% track record for predicting the previous eight recessions going back to 1982. The average time from the initial yield curve inversion to the start of the recession is 13 months, with the longest being 22 months. That would likely put the start of the recession sometime in the first or second quarters in 2024. As mentioned last week’s MP report, recessions usually start just after the first Fed rate cut.

There are several positive forces supporting the U.S. economy, such as the massive fiscal stimulus and the strong labor and housing markets. I am hopeful that these forces combined with a more accommodating Fed can induce a “soft landing,” and not the “hard landing” severe recessions that we experienced in the 1990s, the Dotcom Bust, the Global Financial Crisis, the 2020 Recession.

Our federal debt level just went over $34 trillion dollars, and the Congressional Budget Office has a forecast of $50 trillion over the next ten years, with annual budget deficits running at $2 trillion. To put that into perspective, our annual GDP is currently about $28 trillion dollars. Interest in the massive debt is about $700 billion per year, right up there with Medicare and defense spending. These are real debts, obligations of the USA, that must be paid. God only knows how!

There is a debt crisis looming. The repayment math does not work. We have crossed the Rubicon, and can never cross back. Monetize the debt, they say. It can never be repaid in constant dollars. Print more money and create more inflation, default on our debt, devalue our currency. There are no good answers. The time to raise taxes and cut spending has long passed. Just be aware that this existential threat is out there, and factor this into your investment decisions.

Apparently, the doughnut heads in Washington D.C. aren’t the only ones who can’t control their spending. Over the past two years, American consumers' credit card balances have skyrocketed 40% to a new all-time total of $1.08 trillion dollars. The average credit card interest rate is now more than 20%, an all-time high. Remember, consumer spending is 70% of our economy’s GDP.

Over the holidays, consumers' use of “buy now, pay later” loans hit an all-time high and was up 14% year over year. These types of loans are being called “phantom debt” because the lenders generally don’t report to the major credit-reporting companies. It’s hard to know exactly how much of this debt is currently out there. I sure we will be hearing more about this in the future.

The Discover Financial EPS report just released for Q4 revealed a disturbing trend in consumer credit. The total net charge-off rate of 4.11% was 198 basis points higher versus the prior year period. The credit card net charge-off rate was 4.68%, up 231 basis points from the prior year. The 30+ day delinquency rate for credit card loans was 3.87%, up 134 basis points year-over-year. Personal loans net charge-off rate of 3.39% was up 190 basis points from the prior year. Provision for credit losses of $1.9 billion increased $1.0 billion from the prior year…more than doubled! Is the consumer tapped-out? What about the banks?

THE STOCK MARKET

In last week’s report, we opined: “The January 2022 all-time high at 4818 is squarely in the cross-hairs, and it just seems at matter of time until fresh all-time highs will be seen.” We got that breakout for the S&P 500 on Friday afternoon, with a late surge to 4842, and posting a fresh all-time high close at 4839, up 53 points on the week.

Well, as impressive as all this sounds…the S&P 500 is up a measly 24 points in two years! Yep, the January 2022 high of 4818, versus the January 2024 high of 4842. It was a breathtaking 1300+ point plunge from the high in January 2022, and an equally breathtaking 1300+ rally from the low. And, unless you were fortunate enough to own the “magnificent seven”, your stock portfolio has probably made little headway during the last two years.

Two data points got my attention last week. The Retail Sales report was up more than expected at 0.6% (vs +0.4%), and Jobless Claims came in at 187k, well below expectations. With the labor market showing no signs of stress, and the consumer still spending, the case for the Fed to start cutting interest rates in March is just not there. In fact, the probabilities have dropped from 100% recently, to now just 50% in March. A June or July rate cut looks more probable.

The S&P 500 earnings for 2024 have seen some downward revisions recently. At $247 EPS with a 20x multiple, the S&P 500 will have a target around 4940. The upside Fibonacci targets rest in the 4950-5050 region. For now, this is my target. If another pullback should develop, initial support is at 4802, followed by 4789 and 4740.

THE BOND MARKET

Much like the Fed, the bond market is data dependent. The strong Retail Sales and Jobless Claims data spooked the market. And when two Fed Governors pushed back on rate cuts until possibly third quarter, the 10-year Treasury gave back nearly 25 basis points. For the holiday shortened week, the 10-year Treasury started trading on Tuesday at 3.97%, and by Friday had spiked to the 4.20% level, before closing at 4.13%, up 19 basis points.

As mentioned in last week’s report, I view the bond market as being in a bottoming structure, with the 10-year Treasury fair value in the 4.10% - 4.25% range. I added to my bond portfolio (across the yield curve, 3-months to 10-years) as the market traded in my buy zone on Thursday and Friday.

Keep an eye on the banks. I just don’t think it’s realistic to believe the three bank failures last spring was all there was to the crisis. There are trillions of deeply underwater bonds on the books of the banking industry.

The important number to watch this week is the PCE (Personal Consumption Expenditures), which will be released Friday morning. The PCE is the Fed’s preferred gauge of inflation. IF we see anything close to the Fed’s 2% inflation target…we could see another “everything” rally.

For licensing information, go to https://mortgagesolutions.net/licensing-retail/

Jeff Trusheim is the CFO of Mortgage Solutions Financial. Jeff is a 30+ year veteran in the Wall Street arena, with a background in economics, risk assessment and finance (banking and mortgage). He has previously worked in Fortune 500 companies in growing their portfolio and economic footprint. ?? ?