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IF ONLY THEY WOULD LISTEN

I know my voice and my reach are limited. At the same time, much of what I am about to write will not be shocking for astute students of the economy and markets. In the last several weeks, and most notably last week, market luminaries, including Fed Chair Jerome Powell, Mohamed El Erian, and Jeffrey Gundlach have all sounded the alarm regarding our fiscal irresponsibility. I found it interesting that this was coinciding with another defeat of term limits for both houses of Congress.

A brief digression: my wife and I have a friend who is a Connecticut State Representative and he and I have had a friendly argument for years over term limits. I think ALL elected officials should have term limits, staggered for continuity, but limits, nonetheless. His argument is that we do have term limits in place, and they are called elections. The power of the incumbency is very powerful so the elected have massive inertia to stay in office. The ruling class is indeed a cottage industry.

Let’s get back to the story at hand. These market heavyweights referenced in my first paragraph are discussing that our continued debt and deficits are causing the U.S. to careen to a serious day of reckoning. Jaime Dimon recently commented that the U.S. has 10 years to get its fiscal house in order. My fear is that the compounding impact of our debt combined with higher interest rates could hasten this day of reckoning. Perhaps it is naive to believe that a government under term limits would be more proactive, but I believe there is a certain rationality that people with no incentive to kick the can down the road might be less inclined to allow issues like this to fester.

During Clinton’s Presidency, there was a concern about paying down our debt and in doing so, having a shortage of Treasury bonds! A distant memory and an impossible dream. The challenge will remain, but how do we get there? Democrats want to tax our way to prosperity and Republicans want to get there by cutting spending. As usual, the real answer likely lands in the middle.

Of more immediate concern is the spotlight on regional banks and their exposure to real estate. Chairman Powell noted last week that there are real estate problems that banks will need to work through. Two weeks to bend the COVID-19 outbreak curve gave rise to the permanently entitled work-from-home dynamic and this is causing companies to consider downsizing and/or eliminating offices. The spillover to cities is that the lack of foot traffic is putting economic pressure on small businesses. There will be more to come on this.

For now, economic activity, employment, and wages are too strong for the Fed to start cutting rates, so all eyes are looking towards the May meeting. The sheer number of announced layoffs may be showing the weakness the Fed was expecting from the hiking cycle, so this is starting to come to fruition. Beyond getting monetary policy correct, the Government needs to get serious about fiscal responsibility.

Now, if only we could get to some movement on the term limits idea!

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

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