“Hold fast to dreams, for if dreams die, life is a broken winged bird that cannot fly.” – Langston Hughes


 Last week was a bad week for the equity markets. The S&P 500 was down -2.66%, the Dow was down -2.97% and the Nasdaq was down -3.31%. As of Wednesday morning of this week, the equity markets are pretty much flat. It is appearing that they are giving up most of their gains for 2023. The S&P 500 has been down for the third straight week. Just a reminder, we do not hold any positions in the equity markets except for a small allocation to Private Equity.

Just in the last few days a relatively small company, American Car Centers, declared bankruptcy. They have 40 dealerships around the country and they specialize in selling to lower credit car buyers. They came out with a $220 million dollar issue as an Asset Backed Security offering. What that means is that the assets backing the offering are the outstanding loans to their customers. The sale of the investment grade portion of the loans went fine, however the sale of the below investment grade loans had no buyers. This is the “canary in the coal mine” indicator of trouble ahead.

I subscribe to text messages from a source called The Car Guy. He is a dealer in the car business and gives me insights on the auto industry. Last year he predicted that this year would be the year of auto loan defaults. As the lower end consumer gets squeezed by wages not keeping up with inflation for 24 straight months, those car buyers will start defaulting on their loans. This is just one indication that the economy is starting to get in trouble.

Another sign that the economy is slowing is the demand for industrial chemicals and metals. Last month the aggregate price of industrial chemicals and metals was down around -15% from the previous month. Just a few examples were Urea Ammonia -32.5%, Rhodium -10.8%, nickel k-15.9%, and tin -16.8%. These were just some examples on a long list.

On the housing front, mortgage purchase applications were down from 180,000 to 139,000 last week which shows a slowing in the housing market. In the last few weeks there has been a nationwide drop in housing prices and as long as mortgage interest rates remain high, we will continue to see a decline in housing demand.

The money supply (M2) declined again last month to -1.7% from -1.3%. This is the first time in 60 years that the money supply has gone negative which I talked about in a previous letter. What this means is when there is less money in the system, there is less money to spend.

There are two events coming up that are not getting much attention as to how they will effect the economy. They both have to do with the consumer having less money to spend and that will slow the economy.

The first is, as of today, the SNAP program or otherwise known as food stamps is being cut back by 33% in 32 states. That equates to $95 per person per month for 42 million people. That means that there will be 3 to 4 billion per month or 35 to 50 billion per year not being spent in the economy which is estimated that will lower the Gross Domestic Product (GDP) by 15-20 basis points per year. (One basis point is 1% percent of 1%.)

The second is that the Supreme Court had a preliminary hearing yesterday on whether the Biden Administration could forgive 40 million borrowers of $10,000 per person or $20,000 for low income borrowers of student debt. From most people’s readings, the court seemed skeptical of finding in favor of the the loan forgiveness. If that is true, this will certainly tend to slow the economy over the longer term, however, there is a short term issue that will effect the economy soon. The shorter term issue is the fact that the forbearance of loan payments for the last three years on the student debt will expire on September 1st. The average monthly payment for undergraduate borrowers is $235 and $600 for graduate borrowers. I am pretty sure that the resumption of loan payments has probably not been factored into most people’s budgets. This out flow of payments to service the student loans will be taken out the money now being spent in the economy.

Finally, the private employment agencies Indeed.com and Zip Recruiter.com are starting to report a decline of demand in the posting of job openings. These figures are much lower than the figures that are being reported by the U.S. government. Remember, employment is the last indicator to show that we are going into or are already in a recession. Think about it this way, most employers will hold onto good employees for a long as possible. It is expensive to hire and train a new employee, plus no employer wants to layoff anyone unless they have to. This lower demand for new employees is a start of a trend towards coming layoffs as the economy slows.



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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

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