By Morgan Christen
CFA, CFP, CDFA, CEO and CIO
We seem to be living in the era of “categorization” – there appears to be a category for everything.
However, having recently renewed my driver’s license, I feel there are a few categories missing for those of us beginning to lack melanin. The license form only allows the following hair colors: brown, blonde, black, red, gray, or bald. What about the in-between colors?
I did an informal survey of my current hair color and I do not fit in any category. Height and weight, about the same for years, but hair not so much. Can I still say brown? Probably not. Should I say gray? My ego says no. Where is the taupe option? A nice neutral shade between brown and grey. The taupe option allows me to feel better as it isn’t gray. Was it my kids, the markets or my melanocyte stem cells are getting stuck? It must be these markets.
The wrangling over the debt ceiling has pushed short term rates up quite a bit. The one-month rate stands at 5.58%, well above the rest of the curve.
With Janet Yellen suggesting the government will run out of cash by June 1st, traders took the position they need an enhanced yield to hold the one-month bill as they would be in the crosshairs of any “default.” All involved understand the need to get a deal done and we believe they will. The bad news for taxpayers, the higher the yield the higher the cost of debt.
In the meantime, these higher rates on the short end will continue to haunt banks as depositors demand higher yields on their cash holdings. I recently read that the average interest rate paid on US bank deposits is 0.39%.
As you may remember this was the problem with the Silicon Valley Bank and others, as depositors demanded higher interest rates or they would walk their funds elsewhere, causing banks to sell longer term assets (underwater) to fund the flood.
For additional color, with $17.1 trillion in US bank deposits that equates to annual interest expense of $67 billion at 0.39%. If they were to match the new Apple card rate of 4.2% their interest expense would be $718 billion… a massive difference.
Consumer debt is rising and will surely give you gray hair
According to the Federal Reserve Bank of New York, total U.S. household debt rose 0.9% to $17.05 trillion. For reference, that is $2.9 T higher than at the end of 2019. A notable metric here is the rise in student loan debt, up $9 billion to $1.60 trillion. The concern lies in the forbearance program coming to an end on July 31st.
Consumers in the 18-44-year-old cohort are major consumers and 59% of them carry student debt. As these folks now begin to make payments, one could assume this will hamper consumption since less disposable income will be available. Reduced spending could slow the economy, which is ultimately good for inflation.
Will a slower economy and easing inflation allow for a “soft landing?” That is the taupe option. Not too hot, not too cold. A good look for markets.
As allocators of capital, we believe there is a limited risk of the economy dropping into a severe recession. We could be in a slight one now, but with roughly two-thirds of our GDP being the consumer, we think we should be fine.
After a tough 2022 for the 60% stock/40% bond portfolio, we think the prospects look taupe-ish (not great, but not bad) in 2023.
If you have not updated or completed a financial plan, we encourage you to talk with your advisor at Spinnaker Investment Group and get one completed. With all the noise around us it is great to review your long-term plan. This process tends to quiet the noise and add a bit of peace to your life.
We look forward to speaking with you and we thank you for your continued support.
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