Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

It’s easy to lose sight of the affordability issue for the middle class in our K-shaped economy. Ironically, today’s bonus chart is also a K-shape: credit card usage is up and to the right, and personal savings rates are down.

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This week, we have been giving some thought to what higher for longer actually means. We’ve mainly concentrated on government; the chickens will return to roost shortly. We are running a deficit of 6% of GDP in a “good” economy. Jeff Gundlach submits that the deficit can rise to 9% of GDP in a recession. If rates average 6%, then in 5 years from now, as much as 50% of tax receipts will go toward debt service. 70% of the budget is mandatory spending. It’s problematic.

The financial outlook for individuals is similarly formidable. Rates on auto loans are reaching unprecedented levels. Credit card rates are 25%, used cars 14%, and new cars 10%. We’ve surpassed $1.1 trillion in credit card debt, $1.6 trillion in auto debt, and household debt has expanded to $17.3 trillion. Servicing debts for just a car, home, and student loans for the median household could now eat up 70% of their pre-tax income. On a brighter note, credit card delinquency rates have nearly doubled since Q3 of 2021 but remain relatively low at 2.98%, compared to the 2008 GFC peak of 6.77%.

The 2008 crisis was a Wall Street crash with secondary effects on Main Street. Today’s predicament is rooted in widespread affordability issues that, while they have yet to impact the S&P 500 significantly and Nasdaq, show potential for serious consequences. The metaphorical bowling ball above our heads is becoming heavier to hold up.

A very happy Thanksgiving to one and all. We are eternally grateful for your support of Tier1.

Learn more about the Market Situation Report written by Tier 1 Alpha.


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