A Wall of Worry

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What’s on my mind:

Growing up, Monopoly wasn't just a board game for me; it was a chance for me to crush the competition and assert my dominance - one plastic hotel at a time. That’s totally normal, right?

Today, private equity firms seem to be playing my childhood version of Monopoly… but in the real world, and let's just say the game board is looking a bit of a mess.

PE firms can take money from sources that perhaps are not welcome in public markets. That may sound controversial, but the industry is currently pushing back on new regulations that would force them to vet the people they take money from. PE firms are supposed to take money from investors and then make good bets on great businesses. The twist? PE has a certain Goodfellas flair to their work— very much “F you, pay me!”

And when the balance sheet gets ugly? Bust the place out and file for bankruptcy. The tales are plentiful of PE firms discarding companies like last season's fashion - sometimes ending in disaster.

What’s worse if more business owners were fluent in accounting, drove sales, and streamlined operations, they wouldn't need to roll out the red carpet for ‘financial Dracula.’ So how can we help? Champion your local champions—shop small, shop local! Support those community businesses so they can flourish without having to strike a Faustian bargain.

Now, let’s prepare for the upcoming week so we can be smart with our money, here’s what I’m watching this week:

Rate Auction. On Monday the treasury is auctioning off three and six month treasury bills, with longer term bonds being auctioned later in the week. The treasury runs a Dutch style auction meaning that they sort bids (noncompetitive first, then competitive) from the highest price to lowest price and then fill the orders from high to low until they’ve raised the amount of money they said they would. For example, on Monday the treasury is seeking to raise $70 billion and they are going to do that by selling bonds which are just IOU’s from the government. Once they have sold $70 billion worth of these bills, no more will issue so those who demanded the highest interest (and lowest price) debt potentially not getting all of their orders filled.

U.S. Treasury bill (T-bill) auctions finance the government's short-term cash needs by selling investors a reliable, low-risk investment option. Yields on 3-month and 6-month T-bills set benchmarks for other interest rates, influencing borrowing costs and money flow in the economy. High demand and low yields suggest a preference for safety, often indicating economic uncertainty. How can we use this information? Well, here’s a chart showing how bond yields and equity markets move…or at least how it’s supposed to work is that the two move in opposites - but as we can see here, when short term rates (the orange and purple liines) were held too low for too long, we had to catch up. Now, let’s see if we get back to conventions where yields move lower (less demand for bonds) and equities higher (more demand for equities).

Ok Boomer. This week we’ll get data on how much money is being held in retirement accounts. There is some conflicting data out there, but estimates are that we are losing between 2,000 and 3,500 people from the Baby Boom generation (1946-1965). There there is this study from the NIH suggests that we’re going to need some financial assistance to care for our rapidly aging population. On a related note, this week we get data on how much money is being held in retirement accounts. The infographic below shows that many of us have accumulated wealth in tax advantaged accounts, which is a good thing. But like pizza, ice cream, and beer - too much of a good thing can turn ugly. If you haven’t head about the SECURE Act 2.0 and you’ve got most of your wealth in an IRA, you need to get smart on that law - and fast. Else your kids are going to be giving a lot of that money, unnecessarily, to the government. At some point, we can let our retirement accounts grow without needing to contribute to those mindlessly - don’t get me wrong, it’s a great idea to max out your retirement contributions, but just with anything else, at some point, there are diminishing returns on this behavior.

Rent is too damn high. The cost of housing in America is getting out of control. As my dad loves to remind me, the first house they bought in this country - in 1980 - had an interest rate of nearly 20%. But then again, the house also cost $61,000. And that relationship - between price and interest rates - still exists today. But what the chart below shows is how rising interest rates have really stalled out the housing market. This week we’ll get data on the volume of existing home sales. As interest rates continue to moderate it looks like we’ll see additional inventory hit the market, but we’re far from the hysterics of the pandemic. To ease our housing crisis we need existing owners to sell - but with interest rates staying stubbornly high that’s going to be a big ask.

A wall of worry. There’s an old saw: “the market climbs a wall of worry.” Some go as far as to say that you can tell the mood of the country on the price action in equity markets. The consumer sentiment index are the survey results from a random sampling of US households. People are asked about their personal finances and their outlook for the future of the US economy. As we can see belowthe mood has soured over the first quarter. Since this is a lagging indicator so it may not turn upwards immediately. Though I would argue that, generally speaking, the economy is doing pretty well. We have low unemployment, inflation continues to moderate, and we continue to consume goods and services at a solid pace. But there is some gloom from some of the social media gurus concerning consumer debt, regional banks, and CEOs selling stock. And that’s the thing: bull market uptrends continue despite the economic uncertainty.

So, if the market climbs a wall of worry, then this gloomy outlook might actually fuel the rally in the equity markets that we saw at the end of last week. At the end of the day, the market is a reflection of how people are feeling about hte future. We’re looking for this index to turn more positive which will probably have the short term effect of fueling this rally, but if there is danger in over exuberance: if everyone starts feeling a little too good, the worry is that the other shoe is about to drop, and the market corrects. So, watch out!