Lawmakers will arrive at an agreement that prevents the US from defaulting on its debt, according to Bank of America’s wealth management team. “Since 1960, 78 times over, Congress acted to either raise, temporarily extend, or revise the debt limit, with this time likely no different,” the strategists wrote. “Any uncertainty about the timing and outcome of the resolution adds to a volatile backdrop already in the throes of an earnings reset and growth slowdown,” the CIO added. Recent research from the International Monetary Fund finds that judging where interest rates are headed in the medium term requires an understanding of the real natural, inflation-adjusted rate of interest. This may suggest that low interest rates are on the horizon. Still, many key indicators continue to suggest a recession is on the way, including higher readings of the oil-gold ratio. “I think gold is going to go up a lot,” said Edouard de Langlade, founder of macro hedge fund EDL Capital AG, of the looming debt-ceiling crisis.
Markets Insider/Zahra Tayeb
US debt limit has seen 78 changes since 1960. This time is likely no different, says Bank of America’s wealth management team
The US debt ceiling has been altered 78 times since 1960 despite political standoffs, and that suggests lawmakers will eventually knock together a solution despite a current deadlock, according to Bank of America’s wealth management division.
“Ultimately, it’s our view that an agreement will be reached preventing the U.S. from defaulting on its obligations. Many past instances of debt limit standoffs have been resolved without significant market fallout,” Merrill strategists wrote in a note.
“Since 1960, 78 times over, Congress acted to either raise, temporarily extend, or revise the debt limit, with this time likely no different,” they added.
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Barron’s/Larry Hatheway and Alex Friedman
The Fundamental Reason Interest Rates Will Come Down
Recency bias is found in all walks of life. When making decisions, humans tend to overestimate the importance of the latest information. Sports fans overstate the importance of winning streaks, jurors remember the last thing most clearly (and therefore overweight it in deliberations), and generals make plans to fight the last war.
Recency bias skews forecasts, making them less likely to be accurate.
When it comes to interest rates, we need to be particularly aware of recency bias and how to avoid it. Today, governments, financial professionals, and ordinary citizens are confronted with sharply higher interest rates after decades of falling, and then very low interest rates. Recency bias promotes a belief that high rates are here to stay.
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China and Fed Keep Investors Swinging Between Oil and Gold
The classic commodities recession play of switching from oil to gold is well underway, but it’s far from a smooth progression as investors juggle signals from the Federal Reserve and China’s stuttering post-virus recovery.
The oil-gold ratio — the spot price of bullion divided by West Texas Intermediate oil futures — is a barometer for the state of the global economy, with higher readings suggesting investors are positioning for a recession. The ratio has been rising since mid-2022 and spiked in late March as the banking crisis boosted gold’s allure as a haven.
The last time there was a dramatic move in the ratio was in 2020 as Covid-19 engulfed the global economy, pushing up gold and sending oil into a tailspin. This time round, the situation is less clear-cut.