You’re not hearing enough of this story in the mainstream media.

The reality is that the U.S. consumer is in deep, deep financial trouble. As conditions worsen in the coming months, you should expect to read more and more headlines about it.

Many investors don’t realize how bad things are for the average American. They remember how the Fed lined their pockets with stimulus money after the pandemic. Back then, consumer balance sheets were in fantastic shape.

The U.S. personal savings rate – the amount families have in savings compared with their disposable incomes – soared to a record 34% in April 2020. That was more than triple the 9% average savings rate over the past 60 years.

But things have changed dramatically for the average American in a very short period of time…

Those savings have been depleted. The U.S. savings rate recently dropped to 2.4%. That’s near the record low of 2.1% set in 2005. Take a look…

 

 

Americans used some of the stimulus money to pay down credit-card debt. Households cut their credit-card debt by $157 billion from the beginning of the pandemic to the end of March 2021.

But since then, as inflation has soared, credit-card debt has skyrocketed 20% higher to $925 billion, just shy of a new record. Credit-card debt rose by 15% last quarter, the fastest annual increase in 20 years. It’s almost certain to break the record this quarter.

This debt is a huge problem for consumers because credit-card interest rates just hit an all-time high in December… soaring to more than 19%, according to financial website Bankrate.

In other words, credit-card debt is now far more burdensome than it has ever been.

Household debt – including mortgages, credit cards, car loans, and student loans – now totals a record $16.5 trillion. That’s 17% higher than before the pandemic, and it’s 30% higher than it was at the peak of the last financial crisis.

Debt amounts to an average of $126,000 for every household. That’s a 100% increase over the past 20 years.

The bigger problem is that wages haven’t kept pace with rising debt or prices. Household income, adjusted for inflation, has only increased 9% over that span.

Despite near-record-low unemployment today, “real” wages – wage increases minus inflation – have fallen 8% since the pandemic.

More than 60% of all Americans are now living paycheck to paycheck.

These are startling numbers. They should worry any investor, considering that consumer spending is tied to about two-thirds of the U.S. economy.

Adding this up, the American consumer is faced with…

  • Near-record-low savings
  • Record-high debt
  • Record-high (and still rising) credit-card interest rates
  • 40-year-high inflation
  • And falling real wages

The math simply doesn’t work.

The middle class is being systematically wiped out.

Investors haven’t priced this in yet. The stock market is priced on Wall Street’s projected earnings estimates. Wall Street is currently forecasting corporate earnings will grow 7% this year and another 9% in 2024.

Don’t count on that happening. During recessions, corporate earnings almost always fall. Take a look…

 

 

Over the past five recessions (the gray areas on the chart), corporate earnings fell by an average of around 25%. You can see that Wall Street’s profit estimates for the next few years (the red line) are highly optimistic, considering we’re headed for another recession.

I predict the stock market will hit a new bottom in February, after companies report their fourth-quarter earnings. That’s when most will have provided guidance on the coming year for the first time. Disappointed investors will have to reset their earnings expectations, and the stock market will be revalued.

 

US Economy

 

  • Real retail inventories continue to climb.

 

 

  • The labor market is still robust, with estimates showing some 200k new jobs created in December.

 

 

  • Inflation expectations eased.

 

 

  • New home sales held up better than expected.

 

 

  • Inventories of new housing remain elevated.

 

 

  •  Pending home sales were down almost 40% in November on a year-over-year basis.

 

 

  • The number of states with negative growth is now at the level that signals a recession.

 

 

  • Here is why the Fed will keep rates higher for longer.

 

 

  • The FOMC minutes confirmed the Fed’s hawkish stance, pushing back against market pricing for rate cuts later this year.
  • No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy.
  • Nonetheless, the market sees rate cuts starting as soon as July, …

 

 

  • with some 40 bps of cuts priced for the second half of the year.

 

 

  • The FOMC is not happy with the recent easing in financial conditions.
  • Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability. Several participants commented that the medians of participants’ assessments for the appropriate path of the federal funds rate in the Summary of Economic Projections, which tracked notably above market-based measures of policy rate expectations, underscored the Committee’s strong commitment to returning inflation to its 2 percent goal.

 

 

  • As expected, the ISM Manufacturing PMI signaled a further weakening in US factory activity last month.

 

 

  • Demand is deteriorating quickly, …

 

 

  • However, hiring improved last month.
  • Supplier delivery times are shrinking rapidly amid soft demand.
  • And costs are dropping faster than expected.
  • Falling factory input prices should help ease consumer inflation
  • Demand for labor remains exceptionally strong, fueling the Fed’s hawkish stance.
  • The labor market imbalance persists, with over 1.7 job openings per unemployed American.
  • The Great Resignation is alive and well. For every ten people hired in the US, seven others quit. The quits-to-hires ratio hit a record high.
  • We continue to see persistent strength in the US labor market despite the most aggressive monetary policy tightening in years. The ADP report topped expectations.

 

The Fed

 

The Fed injected massive amounts of liquidity into the markets. It even promised to buy corporate bonds for the first time in its history. Its unprecedented measures pulled our country out of a recession after just two months, making it the shortest recession in U.S. history.

But the Fed made a big mistake. It left its printing presses on far too long. That caused the U.S. money supply to skyrocket. I saw that it was growing faster than at any other point in history.

That’s why [in April 2021] – when inflation was still at less than 2% – I called inflation the biggest threat to the markets. Because of the massive increase in the money supply, I knew inflation was headed much higher.

It takes time for money-supply increases to make their way into the economy. That’s why we didn’t see rampant inflation right after the pandemic when the Fed switched its printing presses into overdrive.

It’s really simple… Big increases in the money supply cause inflation. The late Nobel Prize-winning economist Milton Friedman said it best… “Inflation is always and everywhere a monetary phenomenon.”

According to Friedman, it doesn’t matter whether a country is capitalist, socialist, or communist. Inflation is always caused by the same thing – a more rapid increase in the amount of money than in output of goods and services.

In other words, inflation is a printing-press problem.

The Fed wants you to believe inflation is caused by supply-chain problems… or COVID-19 lockdowns and restrictions… or rising gas prices… or the war in Ukraine.

I’m not saying those things have no effect on prices. They do. But they aren’t the root cause of the problem. They’re just making inflation a bit worse than it would have been.

The Fed is a long way from fixing the problem. In fact, it was still increasing money supply at an annual rate of 10% as recently as [March], when it reached nearly $22 trillion. Inflation had been at multidecade highs for months at that point.

Let me give you some rough baseline numbers that tell the story…

Over the past 60 years, the U.S. money supply has grown at a rate of just under 7% per year. Over that time, inflation has averaged around 3.5%. Inflation lags the growth in the money supply because of increases in output. Our country’s real GDP – a measure of output – has grown at an average rate of around 3.1% over this time.

Now here are the scary numbers…

The Fed has grown the money supply by more than 40% since the start of the pandemic. That’s more than 20% annual growth over the past two years. At normal 7% growth, it would have taken until 2025 to reach today’s money-supply level. Said another way, the Fed jammed five years’ worth of money-supply growth into two years.

That’s unprecedented and abnormal. The only time the money supply has even approached that pace of growth was from 1975 to 1977, when the money supply grew around 30%.

Not surprisingly, right after that, inflation rose to more than 10% and didn’t peak until 1980 at nearly 15%. It took Fed Chairman Paul Volcker raising interest rates to 20% to bring it back down.

The Fed can’t fix the problem without killing our economy. You can forget about a “soft landing.” The Fed is now backed into a corner. It’s left with two choices… higher interest rates or higher inflation. Both are deadly for our economy. It’s a lose-lose situation.

That’s why I think a recession can’t be avoided. And it’s also why it will be much worse and much longer than most people think.

The Fed is now playing catch-up trying to fix its mistakes. It finally began raising interest rates and reducing the money supply. It should have done those things much sooner.

Not only that, it needs to make big, fast moves in order to make a significant dent in inflation. It’s not. The moves have been too small and too slow. The Fed knows that if it moves too fast, it will trigger the next credit crisis. Unfortunately, it can’t avoid it.

Rampant inflation is wrecking the economy.

And if the economic pain grows too high, the Fed will face enormous pressure to reverse policy and make credit easy once again. It will do this by lowering interest rates and printing more money.

But that will only make things worse. Inflation will soar to new highs. That’s exactly what happened in the late 1970s.

To put it simply… the Fed is out of bullets. That’s why I think we’re going to see the next credit crisis very soon. Many companies will go bankrupt and bond prices will plummet.

Don’t get me wrong… I don’t want to see our economy tank. I’m not looking forward to seeing people in economic pain. But the excesses of the past few decades have led to a ton of bad debt that needs to be cleared. In the long run, it will be good for our economy.

 

US Debt Problem

 

“One million seconds is 11 days ago. One billion seconds is 1991. One trillion seconds is 30,000 BC.”

– Unknown, courtesy of Barry Kitt

Let that quote sink in for a second.

The U.S. Government Debt is $31 trillion. We owe much more when you factor in Social Security, Medicare, and pension liabilities.

When debt is low and begins to grow, it’s good for the economy. If you earn $100,000 and borrow $10,000, you have $110,000 to spend. Get good credit, then borrow more and spend more—and so on. We get economic growth from your income and the money you borrowed and spent. At some point, you owe too much and have to pay off your debts, which leaves you with less money to buy things. Debts become a drag on growth. Rising interest rates and rising inflation compound the problem.

We can focus our attention on many things, but too much debt is at the top of the problem list. If I’m correct, though, we have an inflationary challenge over the coming decade. Combining high inflation and low growth equals “stagflation”—not the environment most people have experienced over the last 40 years.

We’ll keep discussing debt over the coming year. (Below is a picture of the problem.) But the U.S. is not alone.

I’m not sure if this is the decade we solve the debt problem, but I hope it is. John Mauldin, calls it “The Great Reset.” We are certainly on that path. Ray Dalio talks about “a beautiful deleveraging.” We’ll figure something out but expect the path to be bumpy.

 

 

Source: US Debt Clock

 

My views are data-dependent and subject to change at any moment, HOPING that someone steps up with a debt reduction plan. Wishing you a Happy New Year!

 

Market Data

 

  • 2022 was a rough year for cryptos.

 

 

  • Where do institutional investors see digital asset prices over the next 12 months?

 

 

  • How did key commodity markets perform in 2022?

 

 

  • The S&P 500 downtrend resistance continues to hold.

 

 

  • Where do analysts see the S&P 500 at the end of 2023?

 

 

  • 2022 saw the largest annual decline for the S&P 500 since 2008.

 

 

  • Back-to-back annual losses are rare, but the odds of the bear market continuing remain elevated, according to MarketDesk Research.
  • Roughly 16% of S&P 500 stocks have a dividend yield above 4%, the lowest level in 11 years. That speaks to high current market valuations.
  • FANG stocks underperformed the S&P 500 by 30% in 2022.

 

 

  • 2022 was the first time the S&P 500 and the 10-year Treasury note lost more than -10% on a total return basis for a full calendar year since 1872.

 

Quote of the Week

 

“Art and love are the same thing: It’s the process of seeing yourself in things that are not you.”

― Chuck Klosterman

 

Picture of the Week

 

 

 

All content is the opinion of Brian J. Decker