JD Straight Up: 28Oct24 - US Election Countdown

Fortnightly Macro View

JD Straight Up:

S&P 500 at 5836 – flat from 5815 two weeks ago - continuing near all-time highs

VIX at 19 – down 10% from 21 two weeks ago

10yr Treasury yielding 4.23% (up 3% from 4.10% two weeks ago)

Agg (US Aggregate Bond Index) at 98.48 – down 1% from 99.81 two weeks ago

Gold at 2754 per oz (up 2% from 2693 two weeks ago) - all time high

Crude Oil (WTI) at 68 per barrel (down 4% from 71 two weeks ago)

Bitcoin at 68,563 (up 2% from 67,047 two weeks ago)

JPM shares at 225 (up 1% from 222 two weeks ago) - all time high - market cap 635bn

Deutsche Bank shares at 17.17 (flat from 17.24 two weeks ago)

Truist shares at 43.91 (flat from 43.91 two weeks ago)

Blackstone shares at 168.79 (up 8% from 156.32 two weeks ago) - all time high

Magnificent 7 Index at 303.17 - up 47% YTD

US unemployment: at 227,000 in latest claims – down 12% from 258,000 two weeks ago

EUR at 1.08 USD (down 1% from 1.09 two weeks ago)

GBP at 1.30 USD (flat from 1.30 two weeks ago)

Macro Environment

Russia and Ukraine continue to war more than 2.5 years from the Feb 2022 invasion.  Israel launched retaliatory bombing of Iran but seems to have largely spared oil facilities.  China commenced stimulus efforts to drive economic growth.  Japan governing party lost its parliamentary majority.  Campaigning for November 5th US elections enters the final week.  US Treasury yields continue to rise from a mid-September low.

Macro View

Uncertainty on future rate policy, election outcome, peaceful power transition, and a looming deficit and debt are contributing to US Treasury yield increases.  The yield on the 10yr is up 17% in a month as it rose from 3.6% to 4.2% and looks likely to continue its climb.  This rise in base rates has had seemingly little impact on asset prices as tech and finance continue to hit all-time highs alongside gold.  An index of the Magnificent 7 tech darlings is up 47% this year while Blackstone is up 40% in just the last 3 months.  Clearly the excess money pumped in through fiscal and monetary stimulus has yet to burn off or find a less speculative home.

Relevance

All bets are on a return to the loose money that allowed the escape from the GFC and the dodging of an economic downdraft from the pandemic.  That elusive 'new normal' that many espoused when rates were artificially held at less than a percent persists as a mirage.  Unfortunately, that is not where rates belong or where they will return to.  That is not at a level of stability or balance.  Rates that are held too low inevitably result in poor use of capital and chasing speculation rather than investment.  The equilibrium point will be where rates are high enough to drive intelligent deployment of capital and fend off inflation.  Hopefully that prolonged period of rates that were artificially too low does not require a hideously painful period of rates too high for many companies or countries to survive in order to reset the equilibrium.  This has happened in the past with money fueled bubbles be it South Sea or Mississippi where the required reset was unsparing.

Head Scratchers

1. If 80% of US mortgages are fixed rate and with a 30-year tenor and many were either engaged or refi'd when base rates were sub 100bps, what is going to motivate anyone to move and undertake a new mortgage in the 6-7% range when house prices have also doubled in the interim?  Especially if they calculate the cost of compounding interest over the life of the mortgage?  The opportunistic or aspirational part of the housing market is curbed.  Housing inventory stacks up.  Housing liquidity dries up.  How long will that take to resolve itself and what will be required for resolution?  As the government understood in creating Fannie, Freddie, FHLB, Ginnie, housing is a key driver of economic growth and connects to transportation, consumer goods, and many other facets of the economy.  If housing breaks, it takes many other drivers down with it.  What is the remedy?

   
   

DFCF, LLC

Drulard Family Capital Fund

Drulard Family Charitable Fund

www.drulardfund.com

#3 - 28Oct24