Welcome to another edition of “Over the Weekend.” This is where I summarize interesting finance and economics content that I read, listened to, or viewed this past week. I also link to the sources so you can check them out “over the weekend.”
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1. Over half of U.S. mortgages originated in 2020 or after.
Genevieve Roch-Decter shared this chart in her Grit Capital Substack:
She also provided this commentary:
Over half of US mortgages were originated in 2020 or later, including refinances.
Think anyone with a 3% mortgage locked in is going to sell anytime soon?
Antagonist’s Take
This data sheds light on a dimension of the housing market that people don’t talk about much. Rising interest rates grab most of the headlines, but it’s usually from the buyers’ perspective. For example, “The market will slow because people don’t want a mortgage with that high of an interest rate.”
But what about sellers?
Most people buy another house after they sell their primary residence. As Roch-Decter commented, however, if you had a locked-in 3% mortgage, would you want to trade it for a loan with double that interest rate?
This means that not only is it less appealing to buy in this high(er)-rate mortgage environment, but there may not be much of an appetite to sell either.
2. Powell tells Congress that interest rates will likely be “higher than previously anticipated”
Yahoo! Finance reported this:
Federal Reserve Chair Jerome Powell told lawmakers on Tuesday interest rates are likely to rise more than previously expected as the central bank works to bring down inflation, which remains stubbornly above the central bank’s 2% target.
Antagonist’s Take
For months, I’ve been openly questioning the Fed’s ability to lower inflation at the rate at which it forecasted.
First off, inflation is incredibly hard to manage, let alone control (which is impossible with a fiat currency).
Throw in a tight labor market, and you’ve got an even bigger challenge.
Based on his comments, Powell may finally be willing to admit that he overpromised and underdelivered. Because, you know, politicians are really good at admitting when they’re wrong…
3. We all lose when it comes to the national debt
Within 10 years, the government will spend more on the interest costs of the national debt that it has spent on research and development, infrastructure, and education…combined…over 50 years!
Also over the next 10 years, the federal government’s spending on interest will exceed even what it spends on Medicaid, defense, and income security.
Antagonist’s Take
The national debt has been out of control for so long that it almost seems beyond reality. The charts above, however, are a powerful reminder that fiscal irresponsibility has very real consequences.
Debts must eventually be paid. And when that happens, other areas don’t get funded.
(Please note that I’m not playing politics here. I do NOT advocate for any party.)
When it comes to public debt, both Republicans and Democrats are guilty.
Here’s the outstanding public debt on the first days of the last three administrations, according to the Treasury Department:
$10.6 trillion when Barack Obama took over on January 20, 2009.
$19.9 trillion when Trump took over on January 20, 2017.
$ 27.8 trillion when Biden took over on January 20, 2021.
(Source: CNN)
4. Will 2 million people lose their job?
The Kobeissi Letter reported these staggering statistics around consumer debt:
Antagonist’s Take
That level of debt is simply not sustainable. One of the only things keeping consumers afloat right now is a strong labor market. If Fed Chairman Jerome Powell gets his way, however, 2 million people will lose their job.
During the Senate Banking Committee hearing last Tuesday, Senator Elizabeth Warren (D-Mass.) asked Powell how many Americans would lose their jobs if the central bank continued its current path of interest rate hikes. Here’s the exchange between the two plus comments from Senator John Kennedy (R-La.):
Powell said he didn’t have the numbers, adding that higher unemployment is not an “intended consequence” of rate hikes.
“But it is. And it’s in your report. That would be about 2 million people who would lose their jobs,” Warren said. “If you could speak directly to the 2 million hardworking people who have decent jobs today who you’re planning to get fired over the next year, what would you say to them? How would you explain your view that they need to lose their jobs?”
“I would explain to people more broadly that inflation is extremely high, and it’s hurting the working people of this country badly, all of them, not just 2 million … we are taking the only measures we have to bring inflation down,” Powell responded.
“Will working people be better off if we just walk away from our jobs and inflation remains 5 or 6 percent?” he added.
While Democrats have been the most vocal critics of the Fed’s plan to raise interest rates to slow the economy and reduce demand for goods and services, Republicans chimed in too.
“When you’re slowing the economy, you’re trying to put people out of work. That’s your job, is it not?” Sen. John Kennedy (R-La.) told Powell on Tuesday.
Source: The Hill
5. The second largest bank failure in U.S. history
Regulators closed the country’s 16th largest bank after it failed to raise capital. It’s the second largest bank failure in U.S. history.
Silicon Valley Bank services early-stage businesses and is the banking partner for a wide range of venture-backed companies. A staggering 97% of startups and other depositors had uninsured balances at the bank. That’s because the FDIC-insured limit is $250,000.
For those who had a balance of over $250,000 at Silicon Valley Bank, it’s unclear how much money they’ll get back and when.
The bank’s closure could also deal a massive blow to innovation. Silicon Valley Bank has 50% of U.S. VC-backed startups as customers. That’s around 65,000 companies.
This is a complicated story, but one of the reasons for the bank’s failure is…
…wait for it…
…rising interest rates.
Many of the bank’s customers saw a significant slowdown in their business growth, valuations, and funding ability due to rising interest rates. That means they were depositing fewer funds into [Silicon Valley Bank] and burning more of their cash on hand. Plus, fewer companies were raising money, which reduced the number of new customers Silicon Valley Bank was receiving.
Source: Stocktwits
(For a concise timeline and summary, check out this Stocktwits post and this Yahoo! Finance article.)
Antagonist’s Take
Silicon Valley Bank’s failure came on the heels of another bank closure, crypto-focused Silvergate Capital. Those back-to-back closures were enough to spook investors in a big way. The market sold off sharply on Thursday and Friday, and the VIX (a.k.a the fear gauge) jumped to its highest level since late 2022.
While the situation is certainly serious, it’s unlikely that we’ll face a financial meltdown like the one we saw in 2008.
The largest banks in the U.S. have much different business models than Silicon Valley Bank and Silvergate Capital, and they’re not as vulnerable to higher interest rates. Investors seem to have more confidence in them as well:
Shares for JP Morgan Chase (JPM), the largest bank by assets in the US, rose 2.5%. Bank of America (BAC) and Citigroup (C) were roughly flat. Shares of Goldman Sachs Group (GS) were down more than 4%. (Source: Yahoo! Finance)
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I hope you are right about us not facing another 2008! It’s scary to witness this stuff and sad it could stifle innovation.
Agree! I want to believe that we learned from 2008. Time will tell.
Black Swan events seem to come out of nowhere, but when you look back at them, you think, “How did we not see this coming?”