QUOTE OF THE WEEK
“A laugh can be a very powerful thing. Why, sometimes in life, it’s the only weapon we have.” – Robert Rabbit
TECH CORNER
Nothing has changed in our opinion that a recession is still coming. If you didn’t read last week’s letter, I am repeating it as I think it is important to understand why the recession is delayed.
As I am sure you are aware, the stock market has, so far, been up this year. The short term upward momentum is still there, however, it maybe stalling as the S&P 500 has been flat since March 18th, a period of almost three weeks.
Next week I will be writing about stock values as compared to previous stock market tops.
******************************
“Larry, you have been saying a recession is coming. What’s up?”
Yes, I have been saying a recession is coming for over a year now and I am convinced it is still in the cards. However, it has been delayed and I will explain why.
First a few facts. Over the last 12 months Industrial Production has been flat? Real Income adjusted for inflation has been flat. But Gross Domestic Product (GDP) is up 3%.
Why is GDP up when Industrial Production and Real Incomes are flat. The answer is that GDP includes spending and that spending is the result of using leverage.
Let’s define leverage. Financial leverage is the concept of using borrowed capital as a funding source. Leverage is often used when businesses invest in themselves for expansions, acquisitions, or other growth methods and can also be used by individuals and governments to buy something today and pay for it later.
What has happened is that the consumer and the government have used this leverage to keep their spending higher over the last year, thus, keeping the GDP up.
There has been a boom with consumers spending on their credit cards resulting in double digit growth in credit card balances over the last twelve months. Add to that, the average interest rate on those balances has gone from around 14% up to 22%. In addition to that, the new fad of Buy Now Pay Later (BNPL), has the consumer using leverage that has kept spending high. This is coming to an end as the consumer hits the spending wall. Delinquency rates on credit cards is at a 12 year high and we are already seeing a decline in consumer spending this year.
Year over year, the U.S, Government has also been on a spending binge. Last year’s Federal deficit was up over 25%. I won’t judge on whether the spending went to good projects, but spending is still spending even with the use of leverage. With Congress now in a dead lock and the government continuing to engage in excess spending, there doesn’t seem to be much of a chance that they will be coming to the rescue of the economy.
The other factor that has kept the economy going is the money that was distributed to almost all individuals after the Pandemic (remember the $1,400 checks) is gone. Most people put that money into savings or paid down debt. The savings rate was really high during the pandemic because people couldn’t go out to spend the money. When the Pandemic restrictions were lifted, consumers went on a spending binge. Those savings are now down to 3 1/2 percent where our normal savings rate in the U.S. has been historically around 7% which means the consumer doesn’t have a savings cushion anymore.
What does this mean for the economy in 2024? Well, the consumer is in debt over their heads, the U.S. Government is not coming to the rescue and the consumer is out of savings. Given this information, it seems probable that a recession may be in the cards for 2024.
