02/07/24 08:58 AM EST

Good News? Bad News? You Decide.

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.

Today's bonus section is a two-for-one special. The first chart shows the annual percentage change in consumer credit, and the second image shows household debt service as a percentage of disposable income. This is a good news/bad news situation for the consumer, and we will let you decide.

As August 2023 concluded, consumer credit experienced a -3.47% contraction, only to ascend by 5.72% over the following four months – an increase of 9.19%. This change, while notable, isn't without precedent. However, it's the aggregate impact that raises eyebrows.

Q4 saw household debt surge by $212 billion, hitting a peak of $17.2 trillion. This uptick included a $50 billion rise in credit card debt, pushing it to $1.13 trillion. Mortgages now total $12.25 trillion, student loans have climbed to $1.6 trillion, and auto loans increased by $2 billion, reaching $1.61 trillion. Overall, household debt has climbed 23% within a span of 36 months. This uptrend is particularly notable in light of the average credit card interest rate from commercial banks sitting at 21.47%, a significant rise from the pre-pandemic rate of 15.09%.

While these figures are bleak, there is a silver lining. So far, households are managing their debts effectively relative to disposable income. Debt service commitments have ticked up to 9.77% of disposable income, which, despite an additional $4.5 trillion in household debt since the pandemic onset, is slightly below pre-pandemic averages. This is due to a combination of term debt (think fixed-rate 30-year mortgages, rising incomes, rising employment and, perversely, rising interest rates as many households are now earning high returns on their cash). The longer interest rates remain at these levels, however, the greater share of debt that will rollover into higher coupon instruments and push these number much higher very quickly. With aggregate savings rates now below 4%, lower than any period other than the three years around the Global Financial Crisis, households do not have much margin of safety.

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