Tariff Wars Are Not My Only Concern
The economy appears to be slowing, debt levels remain a significant worry, and then there's the housing market.
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Markets have snapped back nicely from their early plunge on Monday morning. One of the key triggers of the rebound is a 30-day suspension of planned 25% tariffs on Mexico and Canada while all parties come to long-term agreements. This most likely will entail much deeper and cooperative support in controlling immigration and fentanyl flowing in the U.S, primarily on the Southern border. Canada might have to make greater commitments to its long-standing promise to spend 2% of its gross domestic product on defense, being a member of NATO. As I noted in my column on Monday, I expect any disagreements with our North American neighbors to be resolved in short order.
These will be touted as small victories, as part of a greater trade reset. The primary target of changes in trade policies is obviously China, and, likely, Europe, to a much lesser extent. The new administration has also applied a new 10% tariff on Chinese goods. Not surprisingly, China has already enacted counter tariffs of its own. This is likely to be a headwind for American multinationals that do a significant amount of business with the Middle Kingdom. Apple AAPL is one of many names that could suffer significantly if these trade issues escalate further. Huge importers from China like Walmart WMT will see their margins pressured as well.
Trade wars are one of several key concerns I have around the overall market and economy. The latter appears to be slowing a bit in some sectors. The initial reading of fourth-quarter GDP growth recently came in below expectations. Yesterday, the December job openings report came in 400,000 under the consensus and is now at its lowest level in four years. Tariffs could increase worries about inflation, although the continued strengthening of the U.S. dollar could blunt some of the increases on impacted imports. Any backtrack on the inflation front could pushed back any further decreases in the Fed Funds rate as well.
While tariffs are generating a lot of the headlines at the moment, I remain very concerned about debt levels. This does not get the attention it deserves in the financial press. It took over five dollars of new federal debt in the fourth quarter, to generate one incremental dollar of GDP. This is hardly a sustainable situation, and the U.S. will run up an over $1 trillion tab in fiscal 2025 just to service its existing over $36 trillion debt. One of many reasons that I continue to have a constant eye on the yield of the 10-Year Treasury.
It is hard to see how housing could rebound any time soon, unless mortgage rates come down significantly. The years 2023 and 2024 saw the lowest volume of existing home sales since 1995, and with mortgage rates around 7%, we can expect the same for 2025. Current new home inventory is at its highest level since 2009. Ending on a somewhat brighter note, the analytic service Trepp reported this week that the delinquency rate on commercial mortgage-backed securities, or CMBS, ticked down by one basis point in January, thanks to a 78-basis point decline in the delinquency rate of loans tied to office properties. That does come with a couple of caveats. First, the delinquency rate for office tied CMBS is still above 10%. In addition, delinquency rates on the other five property sub-sectors, like multi-family that Trepp tracks, rose during January.
So, tariffs may dominate the news, but they are not the only thing investors should be watching.
At the time of publication, Jensen had no position in any security mentioned.
