As we celebrate Memorial Day this weekend, please take a moment to pause and honor the brave men and women who made the ultimate sacrifice for our country.
And even though it’s a holiday weekend, we’re busy watching the markets so you don’t have to. At the moment, treasuries are up, the mighty US Dollar is up, and crude is down. That can only mean one thing for equities: they’re down.
It’s almost cinematic the way the plot has been set for a fiscal apocalypse. Here’s a glance at the many moving parts that might converge to create a perfect storm that wreaks havoc on the economy.
Start with the debt ceiling that’s been front and center of recent news cycles. If Republicans and President Biden fail to come to an agreement, America will default on its debt for the first time in history. Not only would it be a global embarrassment, but it would also unleash turmoil in the financial markets. Behind the scenes, agencies are quietly making preparations in case a deal doesn’t come through in time.
The Federal Reserve continues to be a question mark. They’ve been implying a pause in raising interest rates or, at the very least, in slowing the aggression of rate increase. Even so, some Fed members insist that interest rates will need to go up again. More regional and small banks will fail as the Fed continues to tighten the reigns and deposits flee to the safe havens of fixed income. These smaller banks simply cannot match them.
The US Purchasing Managers Index (PMI) in May came in with mixed results. Services rose much higher than expected, which was attributed to higher prices being charged. On the other hand, a lack of new orders led to a deeper-than-expected fall in manufacturing.
On top of that, consumer spending has slowed, with a majority of companies reporting a drop in discretionary spending. This is a recessionary sign that can create a downward spiral of layoffs that then compound the negative impact on overall consumer spending.
One particular area of concern are REIT’s (real estate investment trusts) that focus on office building. Workers have yet to return to their offices in full force, leading to restaurant closures and building owners that can’t pay their mortgages or taxes. The drop in government revenue means fewer services available to those in need and a likely uptick in crime, as we’re seeing in Chicago and San Francisco. The few that succeed will need to reimagine the use of the office space and recreate the “downtown” experience.
There’s enough trouble on our soil, but trouble lurks abroad as well as the US-China trade war escalates. Just recently, China banned companies that handle critical information from buying microchips made by the US-based company Micron and the US is threatening retaliatory measures. The ban may well lead to opportunities in other emerging markets and could have longer term ramifications in other sectors as well.
In an attempt to mitigate geo-political risk, we are seeing a surge in India’s manufacturing industry. Multinational companies are diversifying their operations and trying to reduce their risk. India’s large population, burgeoning middle class, lower cost base, and stable politics make the nation a viable place to manufacture components and products AND market those goods to an ever-growing consumer base with mighty purchasing power. This tectonic shift is already underway and continue to expand over time.
There you have it. The stage is set for an apocalypse, but is now the time? Will the Dow crash by 1,000 points? Are major companies going to flop while consumers make a run on all the cash at the banks? Sure, it’s possible. But what’s more likely is that, in the end, our political leaders will hash out a deal while trying to save face and the world will continue to turn… until the next debt ceiling debacle.
Stay safe this weekend, everyone!
