The Coming Debt Spiral
American Consumers on Borrowed Time…and Money
It’s a light week on the economic calendar, with no major events to finish off the year. Trading volume and price action may also be lacklustre as market participants take a break.
So I started out today musing over the housing market and how bad it’s going to get in 2023. It was going to be my topic of discourse, but let’s save that one for another day. Instead, I’m drawn back to the trends in consumer spending and savings. This is the other elephant in the room we’re not seeing much talk about yet. I think that will change soon!
Bro, Where’s My Money?
At the peak of the pandemic in January 2021, Personal Saving Rate – defined as the percent of disposable income – stood at 20%. Today, it sits just 2.4% which is the lowest level since 2005 and second-lowest since the National Bureau of Economic Research started collecting this data in the 1959.
Just Keep Borrowing
Second, consumer borrowing is skyrocketing. This is especially true of revolving credit facilities – mainly credit cards, home equity lines of credit, and personal & small business loans. Despite the Fed aggressively raising rates, consumer borrowing has not slowed. As of December 2022, US consumer revolving debt sits 9% above the March 2020 peak. +9%…in less than 2 years.
Notably, between April 2020 and April 2021, consumers successfully reduced their revolving debt. But since then, it’s been straight up and to the right. That’s likely due to the fact that servicing these debts is getting more and more difficult as interest compounds.
As a Canadian, I can confirm something similar is happening here. In just 8 months, the interest on my line of credit from TD Canada Trust has gone from around 7% to more than 12%. Revolving credit is EXTREMELY risky, and consumers are extending this kind of debt to dangerous levels & at a rapid pace.
Nothing to See Here
Between October 2010 and October 2022, total consumer credit has skyrocketed a breathtaking 88%. But the American consumer is strong, independent, resourceful and self-reliant…right?
Well, what about that labour market. Nothing can touch it, right Jay?
Hmm. We might have to rethink that. Just take a look at this. When I stumbled across it I was astounded, and not much surprises me these days.
It’s common for the BLS survey to be off by large margins, but by a full 1.1 million jobs? That’s a little more than a rounding error!
So if the labour market is WAY weaker than we were told back in Q2, personal savings are in the tank, and credit card & loan debts are mooning, how long do we have until this speedy F1 racer catches fire and has to pull off the track?
But Borrowers Won’t Default, Will They?
The counter-argument here is that late payments and defaults are low, and thus everything’s under control. The main risk, however, is that revolving credit becomes more of a problem the longer inflation and borrowing rates remain high. This issue will also compound once unemployment rates start to rise.
A recent study from TransUnion found that:
- Credit card delinquencies will reach serious levels in the coming year, potentially rising to rates not seen since 2010.
- New credit cards will be opened at a much higher rate than at any time in the past decade in 2023.
- About one in four Americans (26%) reported plans to seek new credit or refinance in the next year. Of those, 53% plan to apply for a credit card.
- Pandemic-era stimulus funding buoyed household budgets, but that cushion is now gone. That’s why ~14 million more credit cards will be issued in 2023 than in 2019.
Following the pandemic-era boom, consumers are having a difficult time getting used to less disposable income. Temporarily, government stimulus had elevated the standard of living for millions of Americans. Now they want to maintain that level of comfort, and are willing to use credit debt to help with short-term liquidity and cash shortfalls. This is going to be a very interesting movie to watch.
Charts
BTC had a little push off the recent lows, but bulls lack conviction. If they can flip 16960, my next levels to watch are 17.4 and 17.8. Til then, this mind-numbing range between the two red lines continues.
Bitcoin Daily Chart
ETH is going to get interesting soon. Diagonal support continues to hold, with $1140 being the key level and $1355 being the number bulls need to crack for upside continuation. If $1140 breaks, there’s a little double-bottom at $1070 and then a void down to $877.
Ethereum Daily Chart
SPY found support at the daily .50 Fibonacci retrace level last Friday. Long as 378 holds, I see an advance toward 390-400. Good news is the diagonal resistance has come down to 400. This diagonal has been in force since January 2022, so a breakout would be a notable victory for bulls.
SPY Daily Chart
Jay Charles
Editor in Chief, The Trading Tank.
Disclaimer: The publisher does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author.
The Trading Tank is a publisher of financial information and not an investment advisor. We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.
THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY OR PUBLICLY TRADED ASSET DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.
You May Also Enjoy
What’s the Best Time to Invest?
How Did the Billionaires Do in 2022?
