“Let us then suppose the mind to be, as we say, white paper, void of all characters, without any ideas: How comes it to be furnished? Whence comes it by that vast store which the busy and boundless fancy of man has painted on it with an almost endless variety? Whence has it all the materials of reason and knowledge? To this I answer, in one word, from experience…These two are the fountains of knowledge, from whence all the ideas we have, or can naturally have, do spring.”
John Locke, Essay Concerning Human Understanding
Philosophers have always been fascinated with tabula rasa, Latin for a “smooth or erased tablet.” What’s not appealing about a baby’s brain being a blank slate? On January 9, 2024, the phrase was deployed in an op-ed in the conservative Washington Examiner, which purported that, “The moral relativism of the recent past slashed and burned the traditional values of our culture, producing the tabula rasa on which tyrannical revolutionaries always seem to build their utopias.” The irony these identical words could just as easily have been penned in an op-ed in the left-leaning Washington Post published January 9, 2025, to warn the electorate of what’s to come.
With that, against the current backdrop of equal parts hope and dread, a word on what this election will and will likely not bring in the near term. Political capital is expensive currency. Of extending Trump’s 2017 tax cuts that would have expired next year, Senate Minority Leader Mitch McConnell assured the country yesterday that, “I’m sure virtually all of us would like to see most of that extended.” How future Senate Majority Leader John Barrasso, John Cornyn, or John Thune navigates the legislation of the extension remains to be seen. As for House Majority Leader Steve Scalise, two weeks ago, he said that in the first 100 days, the GOP is aiming to pass a package through budget reconciliation that would cut taxes and provide new funding for a border wall.
The question for investors is one of the capacities for these initial moves to reignite inflation. I will be writing more extensively about this subject in the weeks and months to come as Inauguration Day nears. The long story short is that renewing tax cuts will do little to nothing at the margins. Fresh tax cuts will take time to make their way through the economy, and spending on a border wall will benefit a small contingency of contractors. The type of spending that can pressure prices would require a construct of a more CARES Act 2.0 sort, funneling cash directly to U.S. household bank accounts.
In the meantime, we have Rafael to distract us, as in Hurricane Rafael. On its current path, the Category 3 looks like Cuba is in his crosshairs. Oil leases in the Gulf of Mexico could follow. But what follows that should garner the most attention. Flood watches in effect for Florida, Georgia and South Carolina are at risk of extending to areas affected by Hurricane Helene. We can only pray that’s not the case. Things are bad enough there and economically poised to worsen.
QI good friend and mortgage guru, Melody Wright of Huringa, recently illustrated what’s to come for areas affected first by Hurricane Helene and then by its nasty successor, Milton. To do so, she isolated Texas counties that were shellacked by Hurricane Beryl in early July of this year. In September 2023, the overall delinquency rate in affected areas was 5.27%. By September 2024, the rate had risen to 6.58% (upper left chart). We should see evidence of the recent storms’ impact by the time October data are released. As a point of reference, Florida and North Carolina’s September 2024 starting points were 5.14% and 4.11%, respectively. Note that Florida was already materially higher than the nationwide average of 3.91% as it was already bruised from the previous impacts of Idalia and Debby.
As a key aside, U.S. 90-day delinquencies are a barely discernible 0.35% (red line). Focus not on the level, but rather on the recent pick-up in the level as mortgages segue to feeding into the foreclosure pool. The devastation of the storms will only serve to continue amping up the rate of increase in serious delinquencies. As Wright warned, while foreclosure moratoriums were immediately imposed in storm-stricken areas, what matters for purchasing power is the delinquency rate, which cannot be contained. Making matters worse is the lack of flood insurance. Countless homeowners facing home repairs have lost their livelihoods and been forced to find alternative housing arrangements.
I caught up with Wright yesterday afternoon to ask how the isolated Counties could manifest across the map. Her reply: “The default in these impact areas will reverberate across the country as so many of these short-term rental owners live in California and New York. It will accelerate the death of the casino mentality as so many incur financial loss. Come spring, we will see inventory far higher than 2019 levels. Call this the beginning of the end of the landlord class that sprung forth from the ashes of the Great Financial Crisis.”
The good news might be a Federal Reserve compelled to ease more aggressively, which could reinvigorate mortgage purchase application activity plumbing its post-pandemic lows (purple line). The better news is distressed inventory will keep building as those who bought at the peaks in 2021 and 2022 default (blue bars). The trick will be getting banks to play the role of lender of any resort as their aggregate loan books are increasingly impaired by rising commercial real estate and credit card losses. The reality is loosening standards can only arrive when bank balance sheets are clean slates.