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Inside the Economy: Consumer Spending, Bonds, and Imports

By April 17, 2024No Comments

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This week on “Inside the Economy”, we monitor the increased consumer spending in tandem with rising delinquencies on mortgages. Is the Federal Reserve going to consider any rate hike movement before year-end? Consumers are still flooding into the stock market, alongside money flowing into money market bond funds. U.S. goods imported have remained steady or on the rise for most countries. What country is on the downward trend?

 

Key Takeaways:

        • U.S. Head CPI at 3.5 (YOY)
        • Crude Oil at $83.71
        • Credit Card account revolving balances exceed $600B

Full Transcript:
Welcome to another edition of Inside the Economy!

I’m Larry Howes. Thanks for joining me!

Credit card debt is starting to pile up, and there’s a few rumors out there that the Federal Reserve might actually hike rates rather than lower them due to what’s going on. We’ll get that in a second. Don’t count on a rate hike. Don’t count on a rate reduction anytime soon either. We’re just not there yet. Quick look at the numbers. I think what’s important here is take a look at what it was a year ago, April last year.

Everything is up. Yields are up. Unemployment is up a tiny bit. Inflation has stopped dropping. ISM numbers kind of flat. We are starting to see a little bit of impact on a year and a half worth of rate hikes. Just starting to see it now. We have had, actually last year was the largest one year increase in population in us history. They are newcomers coming over the border, as I’ve been told, mostly Texas and a couple of other places.

And even in the light of $20 an hour minimum wage now in California, it’s a lot of money to people south of the border. It’s interesting that there’s so much drama in California. There’s some chains, food chains closing and so on and so forth, which is fine. There’s just a lot of drama over that. Like one, like they didn’t know it was coming. And two, we talked nine months ago about $20 an hour. Minimum wage wasn’t enough for California nine months ago. It’s certainly not enough today. It’s not even adequate in Denver now that we are a sanctuary city.

So the $20 an hour is going to be dispersed. It’s not quite that much here, but there is sort of a concept out there that people think that prices on fast food and food in general, and a lot of things are actually going to come down. They’re not going to come down. The rate of their inflating prices is slowing. We’re simply slowing the rate of growth. We’re not going to pull them down. Very important. More on that later.

The personal savings rate, which was glorious during COVID has cooled. It has returned to more normal rates. And a lot of that is due to consumer spending catching up. Actually, March consumer spending in the US was up probably higher than it should have been.

The other side of what’s happening is debt is starting to pile up. We’re seeing accounts making minimum payments. It’s up almost 11%. That’s a big number. And revolving balances are over about $620 billion, a revolving balance, most of which have interest charges of at least 26%. If you want to do a quick math on 26% of $620 billion, it’s a big number. That’s consumer money. That is simply going into the financial side of the economy, not in the economic side anyway.

We’re starting to see consumers pile up debt, go back to minimum payments. It’s going to slow through the summer. This is going to get worse through the summer. It’s going to get worse before election time. It’s going to get worse in time for what, in my opinion, has always been the first possible rate reduction. I don’t think there’s going to be a rate increase.

The first possible rate reduction in 24 is going to be September. Don’t be surprised if it’s not till 2025. Inflation has to come down a lot more. It’s just a question of time. And believe me, the first rate reduction, whatever it is, whether it’s one, two, one point, quarter of a point, whatever it is, it’s going to be glorious news for about two days. It’s not going to have a huge impact on the economy in real terms. It’s not going to have a huge impact on earnings, which counts in corporate America. They don’t have much public debt. They have lots of cash on their own. I mean, it just goes on and on. It is a media side of things.

And the other side, probably more important side is the Federal Reserve. And you hear the term quantitative tightening. It used to be quantitative loosening when they were putting money in the system. Now it’s quantitative tightening. They’re taking money out. That’s much more important than the rate increases. It’s much, much more important. Taking money out of the system is what brings inflation out of the system. They’re going to slow that process. They know they’re not going to get to the point where they lower costs of things.

And energy, specifically gasoline, is still kind of a bargain. You have to wonder when oil is at whatever it was this morning, $83 a barrel, when the Middle East is all fired up again. Tidy. Bit more about that in a minute. Delinquency rates on homes are starting to creep up. These are mostly homes that were mortgaged in the last six months. Some of these are indicative of people who were really borderline on qualifying. And the delinquency rates are climbing. Not seasoned mortgages, just the ones in the last six months.

We’re not going to have an adjustment in the housing market in the foreseeable future, either in interest rates or in prices, household checking, savings deposits. Yes, it has come down a little bit. The COVID money has come down. It’s been spent. It’s gone off to corporate America. We have spent that. But savings has not dropped significantly. The savings rate has come down, but there’s still $14 trillion sitting in changing accounts. That’s not bad. Earnings are starting to creep up.

We’ve talked about first quarter is going to be when we start seeing respective earnings and yes, we are. Second quarter is going to be good. Third quarter will be great. It’s building their fewer projects, fewer new manufacturing, all kinds of things going on. Even as consumer spending slows, earnings are going to go up.

And I’ll emphasize the fact that here’s kind of how you break out the S&P 500. Right there on the top is that horrible media moniker, the magnificent seven. You know, that’s Apple, Google, Amazon. Tesla is in there. Not for long, but Tesla is in there right now are really high flyers. They’ve really been the great performance and their earnings have been great and they’re really sort of in a market on their own. The dark line down there is the actual S&P 500. And what it’s done is this forward price earnings ratios.

And down there on the bottom, you can hardly see it is kind of a yellow gold. That’s the rest of the S&P 500, the 493 remaining parts of the S&P 500. They are down where they ought to be. They are down where their earnings are reflecting their stock price. The S&P 500 is above that just because of the seven big high flyers. If inflation has stopped falling, then the stock markets have stopped growing. They’re moving sideways. Inflation has come down, peaked. Now it’s leveling off.

S&P 500 got ahead of itself and all the markets got ahead of themselves. That has stopped its leveling off, the beginning of an adjustment in the economy. Indicative of people like me who are very sensitive to risk in the marketplace.

Here is the S&P 500, which is basically that light blue line doing well. The dark bars are contributions, new money into bond funds and money markets. This is very indicative of a lot of liquidity in the market side, the stock side and the bond side. There’s lots of money in the bond side of things. Short term, long term. In anticipation that bond markets are going to start doing well and they will start doing well.

Well, they’re not all going into the stock side of things. They’re not staying in cash. They’re buying bonds, they’re buying yield. They’re going to buy in yield when you get good yield, and we’ve got good yields right now. Valuation fluctuate, but typical coupon yield out there is pretty good. This new money in the bond market is a very good sign. It shows there isn’t much risk in either the stock or the bond market. They’re just waiting for some of these other issues to clear out.

And I don’t think. I still don’t think we’re going to have a recession as the media understands a recession. We’re going to have some kind of soft landing that you’ll never even notice. You’ll just see how things adjust as mortgages hopefully come down. Don’t count on it. Rates will come down. Not nearly as far as people think they’re going to. And just forget the idea that prices in general are going to come down. Rents have stabilized. Housing prices. No gasoline.

Well, that’s sort of got a lot of elasticity in it. Automobile sales have got a lot of elasticity in it. That Ford electric pickup truck, you can get $15,000 knocked off price of that thing if you want to buy one. That’s elasticity. The rest of the stuff, food and labor intensive anything, fast food, all of that stuff, those prices are only going up. There have been a couple of questions on, gee, who are we importing stuff from? And you look at the big glorious line there at the top. That’s Asia. It’s always from Asia. Ex China.

China is the only one on here, right there in the middle. That has come down significantly. Mexico is up, European Union is up. They’re taking advantage of the world’s number one customer buying stuff elsewhere. There was a question about, gee, what is the tax revenue from tariffs? The great tariff war we started with China a little while ago. Well, stuff coming in from China is down.

So is the tariff income is down, which is fine. Also a question on Gee, is the Chinese real estate market as bad as I hear in the media or. I think it was as bad as I hear in YouTube. Yes, there’s nothing more important of the Chinese economy. Certainly if you’re a middle income or anything resembling a consumer in the Chinese economy than real estate and this is all the top real estate developers in the entire country, and this is where their sales are. This represents about 45% of GDP of the entire country is right here. Interestingly enough, they still claim that their GDP is growing in positive numbers. No, it’s not.

Finally, and this is interesting, that price of oil is still actually, gasoline is coming down, price of oil has not dramatically changed in light of what’s going on with Israel and Iran today or yesterday. Here is an important player in the markets, Egypt. Egypt is the largest population of all the Arab countries, used to be a significant liquefied natural gas exporter and a player and a currency provider.

All of that has changed in the last couple of years. You see the bars here where Egypt has not exported any liquefied natural gas. That’s because they didn’t have any. Their infrastructure is aging and getting less efficient. That’s happening everywhere in the Middle East like it happened to Venezuela. And where they didn’t export any of it, they were buying it to keep their rolling blackouts under control.

Sometimes you hear about, oh, there was a six hour blackout in California and it was a tragedy. Well, blackout in Egypt, anywhere, especially in Cairo, five days, not uncommon. They’re grateful for the biggest provider of all of that right now, oil and liquefied natural gas. It’s the United States, so.

Well, that’s enough for now. I appreciate you joining me and always send questions along to info@SHJwealthadvisors.com and I will gladly deal with it.

Thanks for joining me!

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