The Market's Biggest Buyer May Be Disappearing
Submitted by QTR's Fringe Finance
Yesterday, as part of laying out the two paths I can see the economy taking, I wrote that beneath the surface, the American consumer is tapped out. The average consumer - AKA the "retail investor" - has been a key in driving the stock market higher the past half decade.
This morning, I noticed two reports that came out yesterday that add to the conclusion that this "retail investor" looks increasingly broke.
Yesterday The Wall Street Journal highlighted how rising prices and the highest interest rates in decades have pushed even relatively high-income households into financial distress. One example was a hospital operations director earning nearly $200,000 annually who accumulated $15,000 in credit card debt at a 26% interest rate. Despite making the minimum payments, the balance barely moved.
And the broader data confirms this isn’t an isolated story.
As I’ve noted, the percentage of credit card balances that are 90+ days delinquent climbed to 13.1% in the first quarter, the highest level in 15 years and the worst reading since the aftermath of the 2008 financial crisis. Total credit card balances reached a record $1.25 trillion for a first quarter, while average credit card interest rates have surged from 14.6% in early 2022 to roughly 21% today.
Delinquency rates have risen across low-, middle-, and high-income households alike. In other words, this is no longer just a lower-income problem. The financial strain is moving up the income ladder, which fits perfectly with what I’ve been writing about for months.
Student loan delinquencies have also exploded higher as repayment obligations returned. Credit card delinquencies have surged to post-financial-crisis highs.
Auto loan defaults, particularly among subprime borrowers, are sitting near multi-decade extremes. New data from Experian shows that nearly 19% of new vehicle loans now carry monthly payments of at least $1,000, up from 17.4% a year ago and more than triple the 5.4% level seen just five years ago.
Contrary to popular belief, these aren’t primarily luxury vehicles, either. Roughly three-quarters of the loans are tied to mainstream models, led by popular pickup trucks like the Ford F-150, Chevrolet Silverado, and Ram 1500.
The surge reflects years of rising vehicle prices and larger loan balances, with the average amount financed reaching a record $43,952 and the average monthly payment climbing to an all-time high of $770. While delinquency rates remain below 2018 levels overall, both 30- and 60-day late payments are increasing, with the most significant stress emerging among subprime borrowers, who face the highest risk of default as elevated rates and larger loan balances continue to strain household finances.
Meanwhile, as noted yesterday, the personal savings rate has collapsed back toward historic lows as households burn through what little financial cushion remains.
Consumers have continued spending, but increasingly through debt rather than income growth. What appeared to be resilience was often leverage.
The fundamental problem is simple: the modern U.S. economy has become heavily dependent on credit expansion. For decades, growth has been supported by ever-lower borrowing costs, rising asset prices, and consumers’ ability to refinance, roll over debt, and take on more leverage.
That model breaks down when real interest rates remain positive for an extended period. For years, I’ve argued that as long as rates stay near or where they are, consumer finances are only going to deteriorate further. Debt accumulation can sustain spending temporarily, but eventually higher interest costs begin consuming larger and larger portions of household cash flow. At some point, debt service crowds out discretionary spending. Consumers stop buying. Delinquencies rise. Credit availability tightens. Economic growth slows.
As the New York Post put it yesterday, Americans are “too broke to have fun”.
Nearly 60% of Americans say they don’t have enough money to make fun plans this summer — as gas and restaurant prices soar, according to a new poll.
Cash-strapped folks are fueling a “fun drought” with more that 57% of people surveyed saying “cost and budget” are what’s keeping them from having a good time, according to a survey of more than 5,000 US residents.
Overall, the state-by-state survey found 48% of the nation feels like they lack fun in their lives — and 12% can’t even remember the last time they had a free day to enjoy themselves, according to the study, funded by Dave & Buster’s and conducted by Talker Research.
And it will continue getting worse. Positive real rates (or something closely resembling positive real rates) act like a slow suffocation mechanism on a debt-based economy.
Every month that rates remain elevated, more households are forced into the same position described throughout the Wall Street Journal article: juggling balances, making minimum payments, delaying purchases, draining savings, and hoping no unexpected expense arrives.
The uncomfortable reality is that there is little evidence this process reverses on its own. Absent a meaningful decline in interest rates or some form of Federal Reserve intervention, the math continues to worsen. Consumers are already showing signs of exhaustion. Delinquencies are rising. Savings are depleted. Credit card balances are at record levels. Debt counseling agencies are reporting surging demand.
The longer rates remain restrictive, the greater the probability that what currently appears as a gradual deterioration turns into a full-blown consumer retrenchment.
And when nearly 70% of U.S. GDP depends on consumer spending, a consumer retrenchment quickly becomes an economic problem.
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It also means that when the stock market turns lower, what is left of savings and retirement accounts for the very same Americans, shrinking, is going to put them under significantly more financial stress.
If this thesis is correct and the consumer continues to weaken under the weight of elevated rates and mounting debt burdens, I’d be watching areas of the market that have historically been more resilient during economic slowdowns. Things like bonds, gold, consumer staples, defensive sectors, emerging markets with less stretched valuations, and even the equal-weighted S&P 500 all appear better to me than momentum-driven segments of today’s market. That doesn’t mean these assets are immune to a downturn—virtually everything gets hit when liquidity dries up and growth slows. But compared to richly valued technology stocks, speculative growth names, leveraged trades, cryptocurrencies, and other risk-on assets that have benefited enormously from abundant liquidity, they could experience less downside.
If the economy is moving toward a period of consumer retrenchment and slower growth, preserving capital may prove far more important than chasing the last stages of a risk rally.
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