We saw an inflation print that was higher than expectations earlier this month; though core inflation continued to fall confirming that, outside of energy and housing, the rate of price hikes is easing. Of course, energy is what everybody is focused on with prices at the pump at all-time highs, both nominal and inflation-adjusted. Many people are wondering how the U.S. consumer has continued to spend in the face of such inflation, and when the pricing pressure will force real consumer demand destruction to occur? During the COVID pandemic, we saw that U.S. consumers took advantage of the generous Federal payments to reduce their revolving debt (that is, credit card bills). This is a good thing in the long run. There is a chart going around (shown directly below) that seems to indicate that all the good work that people did to reduce their liabilities has gone away as revolving debt is back to all-time highs. According to Federal Reserve data, revolving consumer credit owned and securitized – which largely counts credit-card debt – has reached a new all-time high of 1,100 billion or 1.1 trillion dollars after dropping during the last two years.
We do consider the graph above to be a form of chart crime. It suggests a debt situation that is getting to be more desperate than what is really happening. If we want to know why consumers are continuing to spend when faced with high inflation, looking at the chart above could mislead us into believing that Americans are at a breaking point from a debt perspective.
But when we look at debt as a percentage of disposable personal income (DPI), we can see that Americans actually learned their lesson after the Global Financial Crisis (GFC) of 2008. In the chart above, debt as a percentage of DPI shrank after the GFC from 9% to just under 7%. And the pandemic offered Americans another chance to de-lever themselves in 2020, and they took it. Again, this is good. In fact, though debt has been rising, we are still roughly 1% below the (already low) pre-pandemic levels and 3% below the average from the 1990s through the Aughts.
It is always important to look at what a chart is actually telling us. Using nominal charts often skew recent events to appear to be of more importance than they really are. When looking at revolving debt relative to a relevant metric, the US consumer is in surprisingly good shape from a debt, and therefore debt service, standpoint.
Past performance is no guarantee of future results. Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
Model Updates
On Tuesday, June 14th, several Executive Wealth Management models reduced their exposure to the large-cap domestic stock market, including the Asset Allocation models, the Equity models, and the Alternative Asset model. On Friday, June 17th, the Asset Allocation models moved to their lowest possible tactical equity allocations.
All major equity market sectors are currently in a long-term unfavorable trend.
Quote of the Week
Some 17% of ads shown on televisions connected through a streaming device … are playing while the TV is off.
Excerpt from Suzanne Vranica’s recent article in The Wall Street Journal. According to the story, more than $1 billion a year in advertising is being wasted by streaming services sending commercials to nobody – a benefit for viewers but not for advertisers.
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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on June 10, 2022 to closing price on June 17, 2022
1 Month = closing price on May 17, 2022 to closing price on June 17, 2022
3 Month = closing price on March 17, 2022 to closing price on June 17, 2022
YTD = closing price on December 31, 2021 to closing price on June 17, 2022
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