The Consumer - It's Complicated
I’m fortunate not to be too bright.
Being too smart is a handicap in life. Too many active brain cells can make things more complicated than they need to be. It’s why Occam had his razor.
And then there’s the arrogance of being smarter than everyone around you. Having a high IQ from the start sets you up to be your own god.
Paul’s words in 1 Corinthians 25-28 come to mind:
“For consider your calling, brothers: not many of you were wise according to worldly standards, not many were powerful, not many were of noble birth. But God chose what is foolish in the world to shame the wise; God chose what is weak in the world to shame the strong; God chose what is low and despised in the world, even things that are not, to bring to nothing things that are, so that no human being might boast in the presence of God.”
One thing I have noticed about many of the IQ lottery winners is that they absolutely hate being wrong. Being wrong bursts the bubble they created around themselves. The best way to prevent the popping of the bubble is by surrounding themselves with dumber “Yes Men”. You can do no wrong in these people’s eyes.
Another way to protect your ego is to not put yourself out there. Don’t say anything bold or half-baked. You could be called out, or worse, be wrong. Then “Pop” goes your bubble.
So yes, I am very grateful not to be an IQ lottery winner. Blessed - yes - but no early laurels to rest on. Just a lot of hard work.
And I have been wrong a lot. Being wrong is part of the learning process for me. The bigger the mistakes, the more I learn. I have been a continuous improvement project from the start, with some of my biggest strides after I retired at 58 with most of my gains recently being incremental. Slow and steady.
I don’t have Yes Men as friends and I don’t care about being wrong. Live and learn. Not looking to run for political office.
And all of this has culminated into this moment in time - right now - where I am telling everyone who will listen that:
U.S. Consumer Delinquencies and Defaults will be the Big Credit Event that takes this system down. Consumers spend until they can’t and then they default.
The economic noise out there is loud and I am one of the few voices letting people know what I see happening.
Smarter people than me want you to think it is more complicated than this. Here are many of the things other people are watching:
The Federal Reserve Interest Rate Hikes and Inflation. At this point, it doesnt matter what the Fed does. The Consumer is tapped out whether they ease credit and inflation runs rampant or whether they stay firm and inflation hovers around 4%
The Credit Crunch. So many are sounding the alarm on falling bank deposits and potential bank runs. If there is anything the Fed can fix, it is this. They print money! And of course bank deposits are falling along with credit - the Consumer is tapped out!
U.S. Government Debt. This is a big one, but let’s face it: The Fed could start buying government debt tomorrow with printed money, driving the price of Treasuries down like Japan. Sure, it would cause inflation and flight from Treasuries, but it could buy a lot of time.
Corporate Real Estate. A lot of vacancies. Well, yeah. Consumers are cutting their spending. McDonalds, Walmart, Amazon - they’re all scaling back and people want to work from home. But once again, the fed hasn’t seen a bad loan it doesn’t want to buy.
Housing Starts and Existing Home Sales. Totally Consumer driven.
Ukraine War. I don’t know how $100B really makes much of a dent in a $30T GDP. Frankly, it gave an excuse to release from the SPR which kept oil prices down.
Unemployment. “Any month now it’s going to go sky high!” Not with our demographics. Should be more worried that people over 65 are going to retire.
The problem with Consumer Spending is that it cannot be repaired by the Federal Reserve. Credit delinquencies and defaults will cause credit to tighten which means less credit and higher interest rates. This will cause a credit spiral, where Consumers will not be able to access credit to pay regular bills.
Remember: The U.S. Consumer will spend until they CAN’T. They won’t stop spending because of a budget or because they see what’s ahead. Instead, they’ll stop making that $1000 per month car payment because they wanted the new boat for the lake.
Because inflation has already kicked off, any response by the Federal Reserve or the U.S. Government to print its way out will exacerbate inflation. This will hurt the Consumer further as everything gets more expensive, particularly credit.
Through all that we’ve been through in the past few years, the Consumer has not cut back on spending. They won’t do it voluntarily. It’s in our DNA. Where Consumer Spending increases are seen by the mainstream as a positive for the economy, they are not. Consumer Debt is increasing along with spending. This is unsustainable.
The cracks are already starting to show in subprime auto lending. It is starting slowly, but will accelerate. I expect Q2 earnings in Retail to show some signs of slowing, but the big changes will be in credit markets. Auto lending is the first being affected.
There’s plenty of people out there that think I’m foolish. I’m cool with that. They could be right. Beats the hell out of being smart.