This Halloween, we decided to take a look at the global economy, and what we found made our hair stand on end! From household debt to Treasury yields, there are signs that the US economy may be faltering after a year of restrictive monetary policy. As we approach 31 October, we bring you five scary charts…and one reassuring graph to set your mind at ease.
1. 🏠US household debt is at an all-time high
The US economy has been resilient so far, despite grappling with inflation and rising interest rates all year. But looking at the amount of consumer debt Americans are accumulating could give you a fright: it’s now at an all-time high of over $17 trillion! That’s more than the GDP of many other countries combined.
With all forms of debt – from auto loans to credit cards – piling up, as the chart below reveals, it seems US consumers may be struggling to finance ever-higher outgoings with income alone. But, as we all know, debts eventually must be paid off. Will consumers struggle to meet their repayment obligations when the time comes?
2. 🤑 Unsustainable US national debt
It’s not just the US public – the government is also borrowing like there’s no tomorrow. US national debt has reached $33.63 trillion, $25.8 trillion of this held by the public and amounting to nearly 100% of GDP. All things remaining equal, the Congressional Budget Office (CBO) projects the public portion alone will rise to 180% of GBP by 2053.
High fiscal debt can have negative implications for the economy, leading to economic instability, inflation, and even the potential for default (though this latter point isn’t a concern for the US, given it is the largest debt issuer in the world). This is why America’s high national debt has been so heavily discussed, but we’re yet to see a resolution to this issue.
It’s worth noting that household debt and national debt aren’t alike. While consumers strive to pay off their debts, governments will continue holding certain amounts of debt at all times. However, with interest rates rising, servicing this debt (i.e. paying off the interest on this debt) becomes more expensive for the government in question.
Source: The Concord Coalition
3. 🏢 The commercial property market is in distress
Following prolonged shutdowns after the Covid-19 pandemic and the fastest interest rate hiking cycle in US history, the commercial property market is suffering. The value of distressed US commercial property has hit a decade-high, according to MSCI Real Assets.
This was particularly driven by the office segment, which has struggled amid a shift to remote work. For now, the level of distress remains at half of that seen during the 2008 financial crisis, but MSCI has identified another $215.7 billion worth of properties that could still face issues.
This, in turn, impacts big banks that have large exposures to commercial real estate. For example, Goldman Sachs recently reported below-expectation profits in Q2, down 58% to $1.22 billion, in part due to write-downs on commercial real estate.
Source: Yahoo Finance
4. ⚖️ US Treasury yields hit 5%, but yield curve remains inverted
Amid rising interest rates and expectations that the Federal Funds Rate will remain higher for longer, US Treasuries have suffered a sell-off this year. The yield on the 10-year note has been flirting with 5% for some time. It finally topped the 5% mark on Monday, though it has now dropped lower once again as investors bet that bonds could soon become a safe-haven investment once again.
However, it’s not just the fact that yields on 10-year government bonds have been on the rise that gives us the creeps. A more concerning trend is the fact that the US 2-year Treasury yields are higher than the yield on 10-year Treasuries, currently at 5.07%. This is called an “inverted yield curve” and is considered a harbinger of a recession.
5. 🐢 Global economic growth is expected to remain anemic in 2024
The International Monetary Fund (IMF) forecasts that global economic activity will continue to struggle next year, with advanced economies posting just 1.4% GDP growth, down from 1.5% this year. The US is expected to see growth drop from 2.1% to 1.5%.
This is a natural consequence of aggressive monetary tightening in the world's advanced economies. However, depressed growth is not good for consumers or risk assets.
Source: IMF Blog
But what could it mean for bitcoin? Will investors see it as a safe-haven investment or shy away from its volatile, risk-on nature?
6. 📈 The good news: bitcoin halving next year may lead to price spike
All these scary charts make for gloomy reading! However, it's not all doom and gloom as we head into 2024. In fact, when it comes to bitcoin, price forecasts for next year are generally bullish as we approach the next bitcoin halving.
Expected in May 2024, the halving is a pre-programmed event that happens approximately every four years and reduces the rate at which new bitcoins are mined by half. This scarcity mechanism is designed to control inflation and maintain BTC's value over time.
And when it comes to performance, the halving has historically been a catalyst for BTC price rallies. Indeed, the last one in May 2020 kicked off an uptrend that eventually led to bitcoin's all-time high of $68,790 in November 2021. Similar rallies were recorded after the 2012 and 2016 halvings.
Of course, past performance is no indicator of future returns, but this is contributing to bullish sentiment on BTC, as is the expectation of an imminent bitcoin spot ETF approval in the US, which briefly sent BTC above the $35,000 mark this week.
🗝️ Key takeaways
Though major global economies are struggling with economic growth headwinds following a year of rapid monetary policy tightening, the outlook for the cryptocurrency market next year is more rosy. With the bitcoin halving coming up around May and the mounting anticipation of a spot BTC ETF approval, we could potentially be seeing the end of the recent crypto winter.
The question remains, however, whether investors will see bitcoin as a hedge against economic uncertainty or a risk-on asset to avoid. Recently, BlackRock's CEO Larry Fink said that BTC represents a "flight to quality" - a lower risk asset that could protect portfolios on the downside. If the rest of the market takes a similar stance, global stagnation or even a downturn wouldn't be such bad news for the world’s largest crypto asset.