The US Economy has 99 Problems, & These are Just a Few
and no short term solutions
Welcome to the final quarter of 2023 – a period marked by unprecedented economic challenges, eerily reminiscent of Jay Z's classic "99 Problems." As we dive into the intricacies of this complex financial landscape, we find ourselves confronted with a medley of obstacles that demand our attention and critical analysis.
Problem 1: The Soaring National Debt
Our first hurdle, is the relentless ascent of the national debt. President Biden's fiscal policies, driven by ambitious government spending initiatives, have brought forth a growing chasm in our fiscal equation. The concern here is that we have seen no corresponding increases in taxation to offset these expenditures. Matters could intensify further if geopolitical tensions in the Middle East continue to rise, potentially resulting in higher deficits and future inflation. This financial equation as Jerome Powell said this week is “ Unsustainable”
Problem 2: The Interest Rate Predicament
Next up, we confront the challenge of rising interest rates, with rates over 5% across the bond curve. This surge has culminated in higher monthly borrowing cost for average consumers, with mortgage rates soaring to an astounding 8%. The result? The American dream of homeownership, at current prices has become an aspiration beyond reach for many. This abrupt shift has shattered the comfort zone enjoyed over the past two decades when mortgage rates hovered around 4%. Consequently, the economic ripples extend far and wide, as median sale home price have now tumbled by -17% from their peak in 2022, plummeting from $480,000 to $394,000 as of the most recent data in September 2023.
Problem 3: Stock Market Turmoil
The surging interest rates is reverberating through the stock market, creating an undeniable impact. Banks are issuing stern warnings about plunging profits, and uninsured deposits are surging, triggering alarm bells in the banking sector. Investors, too, find themselves caught in the turbulent symphony. This is no ordinary "99 Problems" scenario – the stakes are high. Adding fuel to the fire, bank stocks, as represented by the XLF index, have witnessed a harrowing 20% decline over the past two years, with an additional 3% drop in the wake of these latest developments.
Problem 4: Tesla's Warning Bell
In our final refrain for this quarter, our spotlight shifts to Tesla and the cautionary words of the iconic CEO, Elon Musk. The stratospheric APR rates, currently perched at 6.5%, have left many potential car buyers unable to afford Tesla's electric vehicles. The consequences are significant – Tesla recently reported earnings that missed the mark by a staggering -37%, coupled with a dismal EPS decline of -9.81%. Revenue expectations also fell short by -3.29%, and gross profits experienced a harrowing descent of -16%. In a desperate attempt to stimulate demand, the company was forced to slash prices, yet even this valiant effort could not sustain growth. Musk, in this week's conference call, candidly expressed his concerns, acknowledging he still has fears of the specter of 2009 when General Motors and Chrysler succumbed to bankruptcy. Tesla's free cash flow, once robust at $3.3 billion in Q3 2022, has withered to a mere $800 million in 2023 a massive decline of -75%.
Not only is this bad for Tesla shareholders, Tesla is one of the seven pillars propping up the entire stock market index, now raises concerns of overvaluation. Its stock price has plummeted by 50% from its peak two years ago in 2021, sporting a P/E ratio of 60 today, all while growth remains elusive with rates perched at 5.5%. The risk for Tesla tilts mainly to the downside, potentially crashing another 50% and even more from current levels, which could have far-reaching implications on overall market indices.
As we approach the conclusion of this year's earnings season, the words of Jay Z's "99 Problems" take on a unique significance – our economy and the markets undeniably face a myriad of challenges.
In these tumultuous times, where navigating the complex financial rhythms is of paramount importance, we are committed to providing you with the most precise and Austrian economics-inspired insights. The Coastal Journal is your trusted guide to help you navigate this turbulent and inflationary bear market with clarity, confidence, and a keen understanding of economic principles.