All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation. Any inclusion of third-party data should not be construed as an endorsement by HW of the source of the data and is included solely to expand our clients’ access to independent research and data related to investing and capital markets.
This article includes mentions some of HW’s primary methods of investment analysis: Fundamental and Cyclical analysis.
Fundamental Analysis involves analyzing individual companies and their industry groups, such as a company’s financial statements, details regarding the company’s product line, the experience, and expertise of the company’s management, and the outlook for the company’s industry. The resulting data is used to measure the true value of the company’s stock compared to the current market value. The risk of fundamental analysis is that the information obtained may be incorrect and the analysis may not provide an accurate estimate of earnings, which may be the basis for a stock’s value. If securities prices adjust rapidly to new information, utilizing fundamental analysis may not result in favorable performance.
Cyclical Analysis is a type of technical analysis that involves evaluating leading indicators, recurring price patterns, and trends based upon business cycles. Economic/business cycles may not be predictable and may have many fluctuations between long-term expansions and contractions. The lengths of economic cycles may be difficult to predict with accuracy and therefore the risk of cyclical analysis is the difficulty in predicting economic trends and consequently the changing value of securities that would be affected by these changing trends.
Any indicators or analyses of past market performance shown in this article are hypothetical and do not reflect the performance of any actual client account managed by HW, any past decisions made by HW, nor the total fees and expenses that would have been paid by a Hesperian client account, which include Hesperian’s investment management fee in addition to the operating expenses and fees of the underlying funds and other investments.
Any reference to a market index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indexes are unmanaged vehicles that do not account for the deduction of fees and expenses generally associated with investable products.
Investing involves substantial risk, including the potential loss of principal. HW makes no guarantee of financial performance nor any promise of any results that may be obtained from relying on the information presented. HW may analyze past performance, but past performance may not be indicative of future performance.
Banking & Debt Ceiling Crisis—First Quarter 2023 Commentary
A banking crisis and a debt ceiling fight at the same time? Our country and economy are now plagued by dual ongoing threats. Even without them, the risk of recession starting sometime this year is high. Our ever-fragile banking system and political disunity only make matters worse. What’s going on? And why does it matter for your finances and portfolio? Read on!
The Banking Crisis
The first thing to know regarding the banking crisis is your checking and savings accounts are safe. None of you—my clients at least—hold deposits uninsured by the FDIC. If any of you were close to the $250,000 FDIC-insured limit per institution per ownership category ($500,000 for joint accounts), I would have helped you diversify your bank exposure long before now.
The real problem will be the aftereffects this crisis will have on the real economy. There are most likely going to be additional bank failures and the problems lie mostly at the smaller regional banks (deposits are fleeing the big banks too but they also have greater resources). Regional banks are the lifeblood of credit creation in this country. They serve as the primary source of credit for small businesses, consumers, and real estate investment, the engines of GDP and the source of most new jobs. But now most banks are going to be too busy just trying to survive to think about expanding or even maintaining their lending. That will only exacerbate the recessionary conditions I already think are present all around us.
There’s plenty of blame to go around. It was a combination of out-to-lunch regulators, poor company management, and free-loading uninsured depositors. But even before all this, the speed at which our monetary authority (the Federal Reserve) was forced to raise interest rates triggered this whole thing.
The way the government calculates inflation partly contributed to its failure to realize inflation was as bad as it was until it was too late. The shelter component, weighted 1/3 of the entire inflation calculation, was changed decades ago such that it lags by a year or more behind how current prices and costs are changing. For example, instead of just looking at house prices reported in real-time, the Bureau of Labor Statistics surveys a small group of random homeowners and asks them what they’d rent their home for if they were going to rent it out (what?). As for rents, increases are only factored in as leases roll over, missing at-the-moment changes in going rents. Thus, headline inflation has ceased to be as good a warning signal. Caught off guard, it was forced to raise rates at the fastest pace in a cycle since the 1980s.
The Debt Ceiling
Now add on top of that the artificial crisis around the debt ceiling. Let’s be clear: This is a self-imposed mechanism meant to stop us from increasing the national debt that has not once worked to keep us from borrowing more (we’ve raised the debt ceiling 78 times). Recurring brinksmanship over raising the debt ceiling has only served to make us look foolish on the world stage. It seems silly to spend money, borrow money (from allies, foreigners, and our own citizens, I might add) and then threaten to not pay it back.
I’m no constitutional scholar, but it seems like the Fourteenth Amendment doesn’t permit us to willfully decide to default on our debts. In any event, I strongly believe eventually there will be a deal. But perhaps only after a scare or two. That said, it costs more right now to insure against a US default than even in past debt ceiling episodes (see the chart to the right).
Our Treasury Secretary Janet Yellen just warned her department may run out of funds as soon as June 1—earlier than expected. There’s nothing like a sober look into the abyss to motivate the President and Congress to negotiate a solution, a recurring prerequisite to resolving an economic crisis historically. In the meantime, we’ll have to accept economic angst and market volatility. Even if there is a solution, the debt ceiling threat (and the unwinding of the backflips the Treasury is doing to hold off from running out of money) may have more lasting negative impacts on our economy and market liquidity.
The Dreaded “R” Word
As we move through the rest of 2023, be prepared to hear the “R” word more and more. Our proprietary recession indicator is flashing red. This factors into our investment decision making. Assets like stocks and corporate bonds that are tied to GDP tend to perform very poorly during a recession. It also factors into financial planning too. This is the time to get aggressive when it comes to increasing your resilience to changing economic tides.
Unfortunately, recessions are a natural and, in fact, necessary part of the economic cycle. They help reset capital allocation and work off excesses and malinvestment. Remember also that the first part of economic downturns and market volatility is unnerving and painful. But afterward comes opportunity. Opportunity to make purchases (a home, a car, etc.) at attractive prices on attractive terms. Opportunity to lower your debt expense (interest rates typically fall in a recession). Opportunity to level up the yield and expected return of our portfolio. A recession is only bad if you’re not prepared.
What Can We Do?
My job has been to help you build up a fortress of sorts, as best we could, with your saving habits and other financial decisions, so you have little to fear now and can weather anything. We’ll just keep working to implement your financial plans, shore up your finances further, make smart money decisions, and if I manage your portfolio, position your investments to protect against the big risks or even benefit from their volatility. How can you double your efforts? Set up a time to talk.
Until we speak again in person, enjoy what’s left of your Spring. And let me know how I can be of further service to you in your financial life.
Eric R. Figueroa, CFP®
eric@hesperianwealth.com
(916) 546-5203
Find a Time to Meet
All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation. Any inclusion of third-party data should not be construed as an endorsement by HW of the source of the data and is included solely to expand our clients’ access to independent research and data related to investing and capital markets.
This article includes mentions some of HW’s primary methods of investment analysis: Fundamental and Cyclical analysis.
Fundamental Analysis involves analyzing individual companies and their industry groups, such as a company’s financial statements, details regarding the company’s product line, the experience, and expertise of the company’s management, and the outlook for the company’s industry. The resulting data is used to measure the true value of the company’s stock compared to the current market value. The risk of fundamental analysis is that the information obtained may be incorrect and the analysis may not provide an accurate estimate of earnings, which may be the basis for a stock’s value. If securities prices adjust rapidly to new information, utilizing fundamental analysis may not result in favorable performance.
Cyclical Analysis is a type of technical analysis that involves evaluating leading indicators, recurring price patterns, and trends based upon business cycles. Economic/business cycles may not be predictable and may have many fluctuations between long-term expansions and contractions. The lengths of economic cycles may be difficult to predict with accuracy and therefore the risk of cyclical analysis is the difficulty in predicting economic trends and consequently the changing value of securities that would be affected by these changing trends.
Any indicators or analyses of past market performance shown in this article are hypothetical and do not reflect the performance of any actual client account managed by HW, any past decisions made by HW, nor the total fees and expenses that would have been paid by a Hesperian client account, which include Hesperian’s investment management fee in addition to the operating expenses and fees of the underlying funds and other investments.
Any reference to a market index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indexes are unmanaged vehicles that do not account for the deduction of fees and expenses generally associated with investable products.
Investing involves substantial risk, including the potential loss of principal. HW makes no guarantee of financial performance nor any promise of any results that may be obtained from relying on the information presented. HW may analyze past performance, but past performance may not be indicative of future performance.