Trends We're Tracking: Homeownership, Ripple Labs, private credit, and grain inflation

Envestnet | PMC provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. Every month our Global Macro Team offers insights into the themes currently shaping the markets to help you quickly take note of recent trends that your clients may be inquiring about.

Stuck homeowners

An affordable home is near impossible to find, and homeowners have become stuck. Years of large gains in home prices, thin supply, and both high and low mortgage rates have created gridlock within the housing market. Low rates have kept some homeowners, around 46 million people with mortgage rates under 6%, in their current homes despite many wanting to sell their home to upgrade. Although they might have gained equity as their home price has risen, a more than doubling of interest rates has made the move less appealing. This has contributed to the low home supply, which was down 26% year-over-year in June.¹ Even moving to a different region is not as attractive as it once was. Remote work has increased competition from others looking to do the same.

SEC vs. Ripple Labs

The U.S. Securities and Exchange Commission’s lawsuit against Ripple Labs took an interesting turn this month as a U.S. District Judge ruled that Ripple Labs Inc. did not violate federal securities law by selling its token, XRP, on public exchanges. This may have large ramifications in crypto markets as many public exchanges relist cryptocurrencies, which the SEC had previously claimed to be securities. While XRP sold on public exchanges may not be a security, the judged ruled that the initial sale of XRP to sophisticated buyers was in fact a violation for securities law.² All this makes the regulatory environment murky at best as a cryptocurrency is and is not a security, depending on the type of transaction. This highlights the need for clear regulation from congress, which many hope to see in the coming year.

Private credit on the rise

Non-bank lending to generally privately held firms, or private credit, is not a new phenomenon. However, it recently hit the significant threshold of $1.5 trillion, according to Preqin Ltd. Having grown from roughly $300 billion in 2010, this market is now on par with high yield bonds or leveraged loans in terms of outstanding debt. While the latter two markets have shrunk in recent years—high yield due to issuers being upgraded to investment grade and leveraged loans due to direct competition from private lenders—private credit is on the rise, with Preqin forecasting the asset class will hit $2.2 trillion by 2027.³ As regulators moot tougher banking rules, potentially crimping another source of financing, relatively lightly regulated private credit looks buoyant.

Grain embargoes put the focus back on food inflation

In July, two key events reminded the global economy about the fragility of the global food supply chain and the potential adverse impact it can have on food prices. First, was Russia's pulling out of the Black Sea grain shipping corridor deal, thus posing significant hurdles for Ukrainian wheat harvests reaching global customers. Secondly, India, the world’s largest rice exporter, imposed an export ban on non-basmati white rice, citing rising domestic food inflation.
Russia’s pullout from the deal did not come as a huge surprise. But its attack on Ukrainian grain infrastructure and ports, and threatening vessels sailing in, resulted in sharp spikes in CME wheat futures prices. While alternative routes via Europe are available, they add to the transportation cost, making it more expensive to transport wheat across the globe.^4,5 

India’s rice ban also has the potential to raise global food prices, as half of the world's population consumes rice. India accounts for 40% of global trade, and the impact of the ban might be accentuated if other exporting countries join the bandwagon and Asian consumers start to hoard. A previous ban in 2007-08 resulted in a 30% increase in rice prices.^6,7

These supply disruptions are happening at a time when the resurgence of the El Nino weather pattern is causing concerns about potential crop damage. If the embargo continues, higher food prices can reignite fears of persistently higher global food inflation.

Sources:

1. https://www.bloomberg.com/news/articles/2023-07-30/housing-market-is-stuck-as-homeowners-with-low-mortgage-rates-stay-put#xj4y7vzkg 
2. https://www.reuters.com/legal/us-judge-says-sec-lawsuit-vs-ripple-labs-can-proceed-trial-some-claims-2023-07-13/ 
3. https://www.bloomberg.com/news/articles/2023-06-16/wall-street-s-hot-new-thing-is-private-credit-a-cousin-of-private-equity#xj4y7vzkg 
4. https://www.bloomberg.com/news/newsletters/2023-07-21/supply-chain-latest-black-sea-grain-crisis-threatens-food-supplies? 
5. https://edition.cnn.com/2023/07/24/business/wheat-prices-rises-ukraine-danube-port/index.html 
6. https://www.bloomberg.com/news/articles/2023-07-20/india-bans-non-basmati-white-rice-exports-to-check-local-prices? 
7. https://www.cnbc.com/2023/08/02/indias-rice-export-ban-to-impact-millions-in-asia-africa-middle-east.html