To The Moon

Business Insider published an article on 10 Mar 2024 that spoke about how Dimon & Dalio’s recession prediction was wrong.

Here is an extract:

The strength of the US economy's performance has some experts thinking the country is on its way to a "soft landing." But not all economists are sold on this rosy outlook.In a recent interview with CNBC's Fast Money Halftime Report, Dimon also expressed some pessimism, stating, "markets change their mind pretty quickly."

"Remember, in 1972 you felt great, too. And before any crash, you felt great, and then things change," he said.

The market has mixed views towards recession as per the screenshot above.

From the 2024 YTD heatmap of S&P500 companies, the companies are mostly in green (doing well - in terms of stock price increase) with a few underperformers like Apple, Boeing, and Tesla.

Are there any remaining concerns in the market? Let us investigate starting with some macro data.

MACRO DATA

The above is a screenshot taken from St. Louis Fed’s website. The Key economic indicators that the Fed looks at are:

• Real GDP growth - Q4 2023 saw strong real GDP growth of 3.2%.

• Unemployment rate - Latest Feb 2024 unemployment rate is 3.9%. This is inching upwards but is yet a notable concern.

• PCE inflation & Core PCE inflation - the PCE inflation is 2.4% (Jan 2024) and Core PCE inflation is 2.8% (Jan 2024). This is still away from the target of 2%.

• Federal Funds Rate - this is the main tool available to the Federal Reserve to tackle inflation while keeping a close look at the job/unemployment market. As of 12 Mar 2024, the rate is 5.3%

Federal Funds Effective Rate is 5.33 as of Feb 2024. The market is expecting the Fed to start cutting rates in 2024. The Fed will base its interest rate decisions on multiple factors including inflation (PCE & CPI), unemployment, job creation, and GDP data. With the latest CPI data (12 Mar 2024), inflation remains sticky.

From the S&P500 chart (one year), the index has gained over 31% and the trend seems to be going strong.

Looking at the above data, should we be feeling like the market that has a bullish run? Does this mean that everything is good and well?

One man’s debt is another man’s asset. - Ray Dalio

OUTLOOK

With the impressive runs in various US indices, should we be concerned with the amount of debt required to fund the GDP growth?

Typically, our disposable income (after taxes) should be adequate for our expenditure. When our disposable income is not adequate, we would typically dig into our savings. When the savings dried up, we would turn to credit facilities and loans to fund our expenses.

This seems to be the backdrop of our GDP growth. Debt has always existed over the years. Should debt be a concern right now? Let us look at the debt situation in the USA - looking at government, corporate and consumer debts.

Government Debts

When the US government runs in deficit, they will issue treasury assets.

This is a news extract about President Biden’s latest budget:

Deficits would total $1.8 trillion in the 2025 fiscal year, 6.1% of GDP, before falling to under 4% over a decade, the White House forecast.

Thus, we can expect more borrowing from the Fed. Failing this, there is always an option to print money.

Current Federal debt stands at $34 trillion with $10 trillion expiring and expected to be re-financed at the current (and higher) interest rate.

X user @RealEJAntoni shared the following post:

It took 63% of all personal income taxes in Feb to pay the interest on the debt - no roads, no military, no schools, no social security - JUST INTEREST:

Corporate debts

Here is a news extract from the above CNBC article:

The number of companies that failed to make required payments on their debt totaled 153 for 2023, up from 85 the year before, an increase of 80%, according to S&P Global Ratings.

“In 2024, we expect further credit deterioration globally, predominantly at the lower end of the rating scale” the firm said.

Nonfinancial Corporate Business; Debt Securities and Loans; Liability, Level stands at $13.636 trillion (Q4/2023) Updated: Mar 7, 2024

Consumer debts

From the above New York Fed post, we see the debts continue to mount for American households:

Household Debt Reaches $17.5 Trillion in Fourth Quarter; Delinquency Rates Rise Total household debt rose by $212 billion to reach $17.5 trillion in the fourth quarter of 2023, according to the latest Quarterly Report on Household Debt and Credit. Credit card balances increased by $50 billion to $1.13 trillion over the quarter, while mortgage balances rose by $112 billion to $12.25 trillion. Auto loan balances rose by $12 billion to $1.61 trillion, continuing an upward trajectory seen since 2011. Delinquency transition rates increased for all debt types except for student loans.

When people are short of money, they usually reach out to their savings as a first resort. Should the need continue, they will turn to other means such as loans, credit cards, overdrafts, and Buy Now Pay Later (BNPL) facilities to substantiate their spending.

Personal Saving rate in the US is at 3.8% as of 29 Feb 2024. This looks to be a downtrend.

When people are unable to pay their credit card bills, this leads to delinquency.

Delinquency rates on credit card loans are on the rise, reaching 3.10% as of the 23 Feb 2024 update.

There is a period of non-payment before delinquency and defaults are declared. Thus, the data would be slow to reflect what is going on in the country.

Conclusion

Debts will take time to snowball. With the high-interest rates (5.33% for the Federal, average credit card interest rate at 22% p.a. and average business loan rate of around 11.5%), the debt could be too heavy to bear.

Business Loan interest rates from LendingTree website

Debts for the US government should not be an issue so long there are buyers. With more countries joining BRICS, the demand for USD has been slipping away. However, it could take many more years before USD can be replaced by another as the global reserved currency. Recently, the take-up of US treasury assets has been slowing down, causing concerns. The Federal government would turn to money printing if this path is not working.

When businesses take up loans over 12% in loans, they will need to make a profit above 12% to cover the interest. In the current climate, this would be inflationary as the interest costs are passed on to the consumers.

This is an extract from a recent Forbes article dated Feb 2024:

A 2023 survey conducted by Payroll.org highlighted that 78% of Americans live paycheck to paycheck, a 6% increase from the previous year. In other words, more than three-quarters of Americans struggle to save or invest after paying for their monthly expenses.

Similarly, a 2023 Forbes Advisor survey revealed that nearly 70% of respondents either identified as living paycheck to paycheck (40%) or—even more concerning—reported that their income doesn’t even cover their standard expenses (29%).

This implies that most Americans do not have an emergency fund that could tie them through 6 months should they be left without a job. With the recent news of layoffs, the outlook seems more challenging.

The USA has found itself fighting proxy wars on several fronts. The recent weather extremities have added to the challenges. While the market has the potential to reach new highs, it would also be wise to consider hedging.

Unless the debts are shrinking, America is inching towards a recession. Let us spend within our means, avoid leverage and invest with what we can afford to lose.

@TigerStars

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