Flat Consumer Credit and A CRE Undertow
Consumer credit has been in a holding pattern since late winter (below).
We have all read the various data points about less credit being extended for home purchases and auto loans while negative credit events such as car repos, mortgage delinquencies and corporate bankruptcies are increasing (corporate bankruptcies of course reduce consumer purchasing power).
Add to this the CRE office problem which creates an invisible undertow to an already stagnant economy. We don’t know that a particular commercial property is in trouble until we read about a PE fund walking away from a loan or a fire sale where a particular property sells for cents on the Dollar versus the original purchase price.
I do believe that CRE will be the catalyst to trigger the next bailout. We won’t have a repeat of 2009 because bailouts are now largely culturally acceptable. The Fed and FDIC will likely roll out BTFP 2.0 once the CRE tidal wave hits accompanied by rate cuts and QE.
In the long run it would be far less painful if the U.S. took its medicine rather than printing its way out of every crisis big and small. Printing only drives prices higher over time, which is why that 10 cent candy bar from the 1980s now costs $1.50 at half the size.
Further, the U.S.’s $35 Trillion debt load and $1 Trillion of Interest Expense creates enormous risk around the Dollar / U.S. Treasury market. At some point interest rates will spike once investors realize that the Dollar is no longer dealing from a position of strength.
The way in which out of control Washington spending will end will be that interest rates will suddenly spike (investors will not want to hold 10-year Treasuries at a paltry 4% yield) and the Fed will be required to monetize the interest expense as Treasury will not have the cash on hand. Once this happens, markets will lose confidence and drive Treasury yields higher. Once this happens, Washington will have a tough conversation with the American people about not being able to afford to make Social Security payments (Social Security is a stupid socialist program put forth by FDR. It would have been smarter to not levy an Income Tax on the American people to begin with). We have seen distressed companies do the same, eliminating defined benefit programs (GE is one recent example).
Think the above is not possible? Just look at the effect our foolish foreign policy has had on the Dollar. For example, we print to pay for bullshit programs such as a $320 million floating pier in the Gaza strip (now sunk) and for untold Billions that have been shipped to Ukraine for a war that the U.S. instigated and that Ukraine has a zero percent chance to win.
The U.S. instigating Ukraine’s war with Russia was a special kind of stupid as it has only devalued the Dollar by way of printing and by way of sanctioning Russia. Those sanctions of course reduced demand for Dollars (at a time that the U.S. was printing) while driving demand Russian Rubles and Chinese Yuan. Look for more currency trade agreements such that between Russia and China as the United States’ foolish decision to weaponize the Dollar has forced countries to look for Dollar alternatives. This fact of course weakens the Dollar’s position as the global reserve currency. Should the Dollar lose that status, say “goodbye” to printing forever and say “hello” to a new gold standard.