On Monday, while perusing the sparse menu of non-geopolitical articles on offer across the mainstream financial media, I read yet another paint-by-numbers piece warning on the perils of 5% rates and the alleged inevitability of a US recession.
I also wrote just such an article, although to be fair to myself, mine wasn’t necessarily a “paint-by-numbers” effort. I put a little thought into it. Not much, but a little.
The problem (and this is well-worn territory) is that the transmission channel from monetary policy to the real economy is severely hampered by the terming out of corporate debt and the almost secular decline of variable rate debt on household balance sheets.
If the figure above looks familiar to you, that’s because I’ve used it before. Twice. Three times counting today. There are only so many ways to present the same information with “different” visuals. At a certain point, making “new” charts with the same data is about like paraphrasing your own writing: There’s something intellectually and editorially questionable (if not quite dishonest) about it.
Anyway, households simply don’t have a lot of variable rate debt as a percentage of total debt. And although the corporate maturity wall is very steep for smaller firms, the slope is much gentler for the S&P 500. In the meantime, interest costs are quite low, and that means profit margins, despite having fallen for three, going on four, straight quarters, are still quite high even amid the steep rise in the cost of labor.
If both households and businesses are insulated from rising rates, well, it’s reasonable to conclude that it could be a while yet before the recession arrives.
“Are we there yet?” SocGen’s equity derivatives strategists asked, of the delayed recession. They promptly answered their own question: “The short answer is no.”
No, because “Over the past decade, households and corporations (especially in the US) have locked in many years of low rates and that is currently acting as a buffer,” they went on, noting that just 10% of all mortgages in the US are adjustable.
You hear every day about how high mortgage rates are — approaching 8%, in fact. But the effective rate on outstanding mortgages has a three-handle.
“Higher rates have been transferred to less than 10% of households,” SocGen’s strategists remarked, on the way to reiterating that the same general dynamic is observable in the corporate sphere.
Profit margins are loitering near half-century highs, with interest burdens at six-decade lows.
Small wonder nobody’s cutting jobs. Workers are still quite difficult to find and keep, margins are near all-time highs and profit growth is expected to inflect positive starting in Q4, and maybe even in Q3 results, which will roll in over the next several weeks.
The read-through for equities — or at least for equity vol — is simple enough. As SocGen put it, “With both the buyers of equities (households) and corporate fundamentals remaining robust, equity volatility has no immediate reason to rise.”
The read-through for the economy is broadly similar. With both the buyers and sellers of goods and services in solid financial shape, the economy has “no immediate reason” to roll over.
