The debt ceiling crisis has come and gone but the financial markets did not get away scot-free. The bond market is facing an avalanche of new bond sales that could pressure interest rates higher.

 

The government's bank account, called the Treasury General Account, is practically empty in sovereign terms. Today, there is less than $50 billion in the account as of June 2, 2023.

 

The U.S. Treasury has been draining this account since January 2023, when the government debt ceiling controversy started to heat up. The government cut back on the number and amount of bond auctions, which were almost a weekly feature of sovereign debt financing in normal times.

 

The dearth of new supplies of government bonds added liquidity to the financial system. As the fear of a government default grew, yields on government bonds rose and liquidity continued to increase. Where did all that money end up — in the stock market?

 

It explains to some extent why investors flocked to the FANG stocks. Investors sought the largest, safest, most liquid equities they could find as bond equivalents. Stocks continued to climb as liquidity increased.

 

Could we be facing a reverse of this situation as the supply of Treasury bills increases in the months ahead? The answer depends on how much money the government will need to raise in the short term.

 

Experts expect the government will need to raise as much as $1 trillion-$1.4 trillion in Treasury bills over the next six months just to return the government's balances to normal. That would include continued funding of the U.S.'s day-to-day needs.

 

If that estimate proves to be accurate, it would be the largest issuance of Treasury bills in history (excluding the major financial crisis of 2008 and the pandemic in 2020). To put this in perspective, the money needed to be raised would be about five times the supply of bills in an average three-month stretch in the years before the pandemic.

 

On the negative side of the ledger, dumping that amount of bills onto the market, while the economy appears to be slowing, is risky enough. If one also includes the problems in the regional banking sector, then we may be flirting with financial danger. Siphoning a lot more money out of the banking system, which has already seen enormous outflows because of the regional banking crisis, would force these banks to raise more cash.  Their financing costs would rise and stress an already fragile system.

 

However, some positives could mitigate some of the risks. Currently, more than $2 trillion is sitting in money market assets yielding over 5 percent at the Federal Reserve Bank's overnight repo facility. This money is what I call "yield-hungry assets" that can move to wherever the return in yields is greatest. That money could easily support the government's treasury bill auctions, but the price of that would be higher interest rate yields.

 

What that may mean for you and me, is an opportunity to earn even more on your money market funds this summer. It could also mean an overall rise in yields on two-, three-, and four-year bonds, which could also offer bond investors opportunities. It could also cause some disruption in the stock market during the same period. Time will tell.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

For more than a year, consumers have been contending with higher food prices. The latest read of April's Consumer Price Index, however, gave some hope that relief may be around the corner.

 

Headline inflation rose 0.4 percent last month but a look under the hood revealed that the "food at home index" declined. This was the second month in a row that prices for fruit, vegetables, meat, and eggs among other items, fell.

 

That may be so, but I certainly am not seeing those price declines in my shopping bill. Let's take eggs for example. You may remember that in December 2022, we were paying as much as $5.46 on average for a dozen eggs. The culprit behind those soaring prices was a historic outbreak of avian influenza or bird flu that coincided with the winter holidays. The epidemic killed millions of egg-laying hens. Since then, influenza has subsided and there have been no new cases detected at commercial farms since December 2022.

 

The industry has bounced back since then and as it has the price of wholesale eggs has fallen. At the end of April, the benchmark Midwest Large White Egg price has fallen to $1.22 per dozen. That is a 78 percent decrease in five months. Some produce analysts expect we could soon see egg prices dip further to below $1 a dozen.

 

The average consumer paid $3.45 for a dozen large Grade A eggs last quarter, according to government data. That is down from January's $4.82, but still more than double the $2.05 the prior year.

 

While this may be good news for some consumers, a trip to my local supermarket tells me retailers have certainly not passed on those price savings to customers. Retailers can sell their eggs at whatever the market will bear. Here in the Berkshires, we are way above the so-called "average" egg prices. At Price Chopper, for example, a dozen cage-free Grade A large eggs are going for $5.39 a dozen, while organic eggs are $8.99. That is a markup of 441 percent and 736 percent.

 

I know there are other costs that retailers need to cover — transportation, labor, etc. — and there is always a lag effect between a decline in wholesale prices and the price we pay at the check-out counter. We could see price cuts in the months ahead for eggs and other products but the jury is still out when it comes to beef.

 

Beef prices remain in the stratosphere. There are reasons for this situation. A continuous and extreme series of droughts in the U.S. in recent years has made maintaining cattle herds expensive or, in many cases, impossible to maintain. Herds (including breeding cows) were slaughtered, which has resulted in a growing scarcity of beef products. This year will be the first significant drop in beef production since 2015. Less beef supply usually means higher prices if demand remains the same.

 

There is some evidence, however, that beef prices may have reached a level where consumers are beginning to cut back on their beef purchases. Tyson Foods, which processes 20 percent of the nation's beef, poultry, and pork, saw its first fiscal quarter net income drop more than 70 percent based on weaker results in all three of those product areas. Analysts believe some consumers are substituting more chicken and pork for beef in their diets. Tyson was caught between higher live cattle prices and less consumer demand and was forced to reduce prices somewhat. Will this trend continue?

 

That remains to be seen. Demand for beef usually picks up about now (during the grilling season), so this summer will be key to determining the consumers' appetite for continued purchases of high-priced hamburgers and steak. If so, we can expect meat processors and retailers to charge even higher prices in the fall and winter for meat. However, if the economy begins to slow, consumers might cut back even more on their spending across the board and that could keep beef prices flat or even slightly lower.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Nationwide, rents have been climbing since the pandemic, but it is still cheaper to rent than to buy in most of the country. As such, in some states, building houses-to-rent is becoming a trend.

 

Home prices continue to soar with the median sale price of a U.S. home gaining 32 percent in the first quarter of this year from the same time in 2020. Throw in the climb in mortgage interest rates and there is no wonder that a record number of Americans believe it is a terrible time to buy a house, according to a Gallup survey. Renting seems to be the only alternative.

 

But the unfortunate fact is that rents are growing faster than incomes in the U.S. The trend began two years ago and is gaining steam. The reasons are simple. As the pandemic abated, the number of U.S. households grew by 1.48 million. Young adults, who had been sheltering with their parents at record numbers, began moving out and finding their places. Unfortunately, a soaring housing market locked out many of these would-be first-time home buyers.

 

That has forced many to rent while waiting for interest rates and housing prices to decline. At the same time, many local governments and management companies that had limited rent increases during the pandemic began lifting those rent controls. As a result, landlords are jacking up rents to make up for two-plus years of rent freezes just as the demand for rentals has increased.

 

In addition, the trend toward working from home opened opportunities for white-collar workers to move from pricey locations to more affordable areas. That wealthier demographic trend has driven rental prices higher in areas where there was not enough inventory to satisfy this influx of demand.       

 

In the first quarter of 2023, the average renter, according to Moody's Analytics, needs to spend almost 30 percent of their monthly income on monthly rentals. That sounds like a lot, and it is, but that number is down from last year's historical peak when the rent-to-income ratio was higher than 30 percent.

 

Last year there were several urban centers where the burden of high rents was overwhelming incomes. As you might imagine, cities such as New York, Boston, Philadelphia, Houston, Palm Beach, Miami, Los Angles, and Northern New Jersey are experiencing rent increases that are above the typical mortgage payments.

 

Entrepreneurs in the building and construction industry are recognizing the opportunity in the rental markets. Their answer is build-to-rent (BTR) housing. BTR allows the renter to move into a brand-new home without the need for a huge down payment, or a long-term lease. In many cases, that rent includes amenities and professional property management.

 

In most cases, build-for-rent homes are clustered together and form a community like an apartment complex but not always. Depending on the locale, some communities consist of townhouses or cottages, or even detached family houses.

 

Builders like the concept, since the community projects can be put together in bulk and all at once. Construction can be accomplished faster and without checking in with the home buyer, who may have countless questions, changes, and thus delays. Potential landlords like them as well since each house is designed for efficiency, making repairs and maintenance easier.

 

There is a housing shortage in America. Experts believe the nation needs anywhere from 3 to 6 million more homes. Build-to-rent homes won't satisfy that demand overnight, if ever.

 

It is early days in the BTR market since there are only 115,000 units in the construction pipeline throughout the U.S. Arizona, North Carolina, and Texas lead the nation thus far in construction and many municipalities are still struggling with how to zone these communities. In 10 states there is no construction planned at all including Oregon, Massachusetts, and West Virginia, according to the National Rental Home Council. As rental prices continue to climb, however, so too will build-to-rent housing in my opinion and that is a good thing for both builders and renters.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

The only thing that mattered to investors this week was the looming U.S. government debt default. Fortunately, the comments from major players in the debt talks have been largely encouraging. The devil, however, will be in the details.

 

The stated deadline for the passage of raising the debt ceiling is June 1, according to Janet Yellen of the U.S. Treasury Department. Some argue that it is a self-imposed deadline. Depending on several factors, including tax revenues, the U.S. might conceivably stretch its ability to pay its debt as far out as August, but that is no sure thing.

 

In any case, even if the two sides fail to agree on the details there is also the possibility of extending the debt ceiling limit a few weeks for the t's to be crossed and i's dotted. No one is talking about that yet, since Washington deadlines, artificial or otherwise, have the effect of galvanizing politicians to cross the finish line if at all possible.

 

House Speaker Kevin McCarthy said late last week that the House could vote on a debt ceiling deal as soon as this coming week. Both sides have gone out of their way to assure the public that a debt default is not on the table.

 

The discussions are continuing, and the negotiators are keeping the talking points close to the cuff and behind closed doors, which is another positive, in my opinion. The fact that McCarthy is talking directly to two of President Biden's most trusted negotiators is encouraging as well.

 

But every time one side or the other expresses something negative, markets react as they did on Friday when GOP Representative Garret Graves, who is leading negotiations for McCarthy, said "It’s time to press pause because it's just not productive." Market gains evaporated in seconds. Investors should expect more of this volatility next week.

 

Complicating the picture, however, is that both the House and Senate left town on Thursday and the Senate is not expected to be back in session until the last few days of May. There is also a danger that the hardline radical group of Republicans in the House could balk at any compromise hammered out by both sides.

 

In sum, while the markets are betting that a deal will be done on time, the danger is that it won't. If that were to occur, the downside in stocks could be considerable.  

 

The stock market, which has been stuck in a tight trading range for weeks (4,050-4,160), broke above that range and the S&P 500 Index vaulted above the 4,200 level this week. My upside target is still 4,325. Technology, semiconductors, and anything that remotely had something to do with artificial intelligence (AI) continued to lead the markets. 

 

Sectors that had been held back due to the risks associated with the debt ceiling found some strength while your typical safety trade areas such as precious metals, utilities, consumer staples, health care, etc. lost ground.

 

On the Fed front, there seems to be a crack in the monetary mantra that more interest rate hikes are on the way. Several Fed members seem to be advocating for a pause in the rate hikes, while others thought that we still needed at least one more hike. But none of them suggested that a rate cut was on the table any time soon.

 

In the coming week, all eyes will remain focused on Washington. President Biden plans to fly home early from the G7 meeting to shepherd the talks as the clock ticks closer to the deadline. If the politicians can keep control of the narrative and come to a deal, we could see my target met before the end of the month. If not, look out below.

 

 

For more than a year, consumers have been contending with higher food prices. The latest read of April's Consumer Price Index, however, gave some hope that relief may be around the corner.

 

Headline inflation rose 0.4 percent last month but a look under the hood revealed that the "food at home index" declined. This was the second month in a row that prices for fruit, vegetables, meat, and eggs among other items, fell.

 

That may be so, but I certainly am not seeing those price declines in my shopping bill. Let's take eggs for example. You may remember that in December 2022, we were paying as much as $5.46 on average for a dozen eggs. The culprit behind those soaring prices was a historic outbreak of avian influenza or bird flu that coincided with the winter holidays. The epidemic killed millions of egg-laying hens. Since then, influenza has subsided and there have been no new cases detected at commercial farms since December 2022.

 

The industry has bounced back since then and as it has the price of wholesale eggs has fallen. At the end of April, the benchmark Midwest Large White Egg price has fallen to $1.22 per dozen. That is a 78 percent decrease in five months. Some produce analysts expect we could soon see egg prices dip further to below $1 a dozen.

 

The average consumer paid $3.45 for a dozen large Grade A eggs last quarter, according to government data. That is down from January's $4.82, but still more than double the $2.05 the prior year.

 

While this may be good news for some consumers, a trip to my local supermarket tells me retailers have certainly not passed on those price savings to customers. Retailers can sell their eggs at whatever the market will bear. Here in the Berkshires, we are way above the so-called "average" egg prices. At Price Chopper, for example, a dozen cage-free Grade A large eggs are going for $5.39 a dozen, while organic eggs are $8.99. That is a markup of 441 percent and 736 percent.

 

I know there are other costs that retailers need to cover — transportation, labor, etc. — and there is always a lag effect between a decline in wholesale prices and the price we pay at the check-out counter. We could see price cuts in the months ahead for eggs and other products but the jury is still out when it comes to beef.

 

 Beef prices remain in the stratosphere. There are reasons for this situation. A continuous and extreme series of droughts in the U.S. in recent years has made maintaining cattle herds expensive or, in many cases, impossible to maintain. Herds (including breeding cows) were slaughtered, which has resulted in a growing scarcity of beef products. This year will be the first significant drop in beef production since 2015. Less beef supply usually means higher prices if demand remains the same.

 

There is some evidence, however, that beef prices may have reached a level where consumers are beginning to cut back on their beef purchases. Tyson Foods, which processes 20 percent of the nation's beef, poultry, and pork, saw its first fiscal quarter net income drop more than 70 percent based on weaker results in all three of those product areas. Analysts believe some consumers are substituting more chicken and pork for beef in their diets. Tyson was caught between higher live cattle prices and less consumer demand and was forced to reduce prices somewhat. Will this trend continue?

 

That remains to be seen. Demand for beef usually picks up about now (during the grilling season), so this summer will be key to determining the consumers' appetite for continued purchases of high-priced hamburgers and steak. If so, we can expect meat processors and retailers to charge even higher prices in the fall and winter for meat. However, if the economy begins to slow, consumers might cut back even more on their spending across the board and that could keep beef prices flat or even slightly lower.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.