Presumable Pause

Hooray, rate hikes are over! With yet another bank (PacWest) disintegrating before our eyes, a debt ceiling debacle that looks suspiciously grave, and a 3-month 10-year yield curve that is profoundly inverted, the Fed finally hauled out language suspiciously similar to what’s been previously used to signal the end of a tightening cycle, while still (theoretically) retaining a tightening bias. The pause has finally arrived. The pivot remains MIA.

Rent Reversal

New-lease asking rent growth is plummeting! After rising 14.5% Y-o-Y through last May, new-lease rent increases rose just 2% in 5/23 compared to 5/22, and may well turn negative, something that since the Housing Bust only happened during the first few months of Covid in 2020. With new-lease rents barely rising, renewal rent increases are also softening because rental vacancy rates have risen by a substantial two percentage points Y-o-Y.

Big Balances

Currently, there’s $57 billion in the Treasury’s General Account and $92 billion in extraordinary measures for a total of $149 billion. However, the TGA usually has a balance of $600 billion, with non-debt cash outflows averaging $30 billion/day. Come early June, the TGA will fall to $50 billion. If, however, the TGA can stay solvent until 6/15/23, an infusion of corporate taxes should keep the government solvent until early August.

Box Breakdown

The Y-o-Y percent change in cardboard box demand as measured by the three-month moving average (which is used to reduce monthly volatility) is down 8.3%. This is the largest decline since the Great Recession when demand fell 12%. The last four times Y-o-Y demand has fallen by 4% or more, a recession has occurred three times (dotcom, housing bust, Covid) and the Fed got lucky in 1994/95.

Rorschach Report

May payrolls grew by a strong 339,000, March and April employment was revised up by 93,000, and wage growth remained strong at 4.3%, largely unchanged since 1/23. But the unemployment rate ticked up to 3.7%, its highest rate since 10/22, and worryingly, the workweek keeps falling, from 34.4 to 34.3 hours M-o-M, its lowest level, outside 3/20 and 4/20, since 1/20. It’s equal to losing 400,000 FTEs. Fed shouldn’t raise.

Super Sneakers

The highest price paid at auction for a pair of sneakers is $2.2 million in 2023 for a pair of Nike Air Jordan 13 ‘The Last Dance’ worn by Michael Jordan in the 1998 NBA finals. Next at $1.8 million is a pair of Nike Air Yeezy 1 Sample sold in 2021 and worn by Kanye West in 2008 at the Grammys. For sneakers, really?

Political Parties

Voters who are fiscally and politically liberal overwhelmingly vote Democratic. Conversely, voters who are fiscally and politically conservative vote overwhelmingly Republican. Voters who are fiscally conservative yet socially liberal are too few to matter. That leaves voters who are fiscally liberal and socially conservative. They are a large group, and vote in large numbers for both Democrats and Republicans. They are the proverbial swing voters that politicians should focus on.

Bankruptcy Buildup

While bankruptcies were low in 2021 and very low in 2022, they are now meaningfully rising. Through April, U.S. bankruptcies, are at their highest level since 2010, and the immediate aftermath of the Great Recession. The rise is the inevitable result of higher interest rates, the failure of some regional banks, rising office building vacancy rates, progressively tighter lending conditions, increasingly skittish bond buyers, and a weak IPO market.

Ceiling Crisis

If the debt ceiling standoff continues, there are five workarounds. In order from the least bad to the worst, they are as follows: Treasury could prioritize interest and principal payments, the President could invoke Section 4 of the 14th amendment, the Fed could lend against defaulted debt, Treasury could issue premium bonds offering sky high interest rates, and Treasury could issue a platinum $1 trillion coin.

Dwelling Deficit

Between 2000-2010, the housing stock rose 15.8 million and the number of households rose 11.2 million. Thus, vacancies rose 4.6 million and the vacancy rate rose 2.4 percentage points. There were plenty of houses. Conversely, between 2010-2020 the number of units increased just 8.8 million, but the number of households rose 10.1 million, resulting in vacancies falling by 1.3 million and the rate falling by 1.6 percentage points, a housing shortage.

Claims Concern

While last week’s first-time unemployment claims were at their highest level since the week ending 10/30/21, the rise in continuing claims is more concerning. Currently, 19 states show a 25% Y-o-Y increase in continuing claims, the highest percentage outside a recession since 1990. The long-term average is nine states, and every time that level is surpassed a recession is either already happening or is about to start.