A debt crisis at the gates of the economy

A debt crisis at the gates of the economy

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Good morning. As stable as ever: Yesterday’s potentially market-moving news—Home Depot earnings, the producer price index, a Jay Powell appearance—all went more or less as expected. Sales at Home Depot stores continue to fall as the frozen housing market takes its toll, but the situation is no worse than expected. The PPI numbers looked hot, but the details were slightly encouraging; the components that directly feed into the Federal Reserve’s main measure of inflation (airlines, insurance) have increased only moderately. Powell repeated his recent mantra: patience. This is all very soothing, but if we get a shock to the Consumer Price Index today, none of this will matter. Email me: [email protected].

Household debt

U.S. household debt levels, taken collectively, are not a problem. We learned the lesson of the mortgage debt frenzy of 2003 to 2008, and it seems we haven’t forgotten it. Here is household debt as a percentage of GDP:

Most of the decline in this graph is due to the decline in the mortgage debt burden (the graph actually looks roughly the same shape if you divide household debt into total household assets rather than GDP ). But among the major subtypes of debt, only student loans have grown relative to the economy over the past two decades, and they are falling today:

Line chart of household debt subcategories as % of GDP showing Best

Americans, as a whole, do not have a debt problem (except of course the debt carried by their government). But aggregation is misleading. As we’ve discussed in this space before, households at the lower end of the income scale with variable rate debt appear to be in deep trouble. This is reflected in both crime statistics and the profits of companies serving the working class and the poor.

The reference source for household debt data is the New York Fed’s Household Debt and Credit Report, and the update for the first quarter was released yesterday. What this showed was that in the most recent quarter, the problems at the lower end of the scale got worse, but not much worse. We have already discussed the notorious picture of transitions to serious defaults among auto loans. Among auto borrowers under 40, delinquency figures continue to approach financial crisis levels. There is also a distinct whiff of stress in the picture of transitions to credit card delinquency:

Credit Card Chart by Age

The most striking element is the red line: people in their 30s are becoming seriously delinquent at rates well above the levels of the last decade. And this cohort is doing much worse, relative to their own history, than people in their 20s (the light blue line). I don’t know what to think about it, but it’s not good.

New York Fed economists, in a blog post accompanying the report, examined delinquency rates stratified by borrowers’ credit usage. They discovered another striking trend: Borrowers who have “maxed out” their credit limits are defaulting at a rate unprecedented in the last decade. Again, these tend to be younger, lower-income borrowers. Their table:

maximum borrower delinquency rate

The picture is becoming clearer and clearer. Strong household balance sheets on average – but acute tensions at the margins.

Gold’s rally is still weird

In December, we wrote that gold’s rise was “bizarre” given high real interest rates (real rates are the opportunity cost of owning financially inert pieces of shiny metal). Well, the rally has gotten about 15 percent weirder since then:

Line graph of the price of a troy ounce of gold, in dollars, showing its minting

At the time, we offered four possible explanations for the rebound: signs of lower real yields ahead, a weaker dollar, growing geopolitical tensions and central bank demand for gold. In the meantime, the dollar has strengthened and real rates have risen (the inflation-protected 10-year Treasury yield rose from 1.98 percent to 2.15 percent), but gold ran its course.

Some argue that real rates will fall when the Fed finally lowers its key rate. But it doesn’t have to be that way. I have no idea how real rates will move in the coming months or years, regardless of what the central bank does. This question is the subject of intense debate among economists: Are we in a new era of higher interest rates, or are we about to return to the old normal of low rates? If gold speculators think they know the answer, I can only wish them luck.

It’s also possible that gold buyers are looking at a new era of higher inflation. But, again, gold has not historically been a great hedge against inflation in general; just a big hedge against high inflation accompanied by low real rates. Perhaps gold investors are anticipating a specific inflationary scenario – a financial repression, in which inflation accelerates but central banks keep rates artificially low for fear that the sovereign debt burden becomes unsustainable. At the same time, perhaps more countries will leave the defunct dollar-based world order, holding more and more of their reserves in gold. Possible? Yes. Is it possible to predict with useful precision? Probably not.

When it comes to non-financial geopolitical risk – the specter of wider conflict and the disintegration of the global security order – we must remember that markets are as useless as we are at predicting this kind of things. When it comes to war, there is no wisdom of crowds.

Are these light predictions enough to explain gold surging above $2,000 – the level at which Asian retail demand is expected to decline? Well, grand narratives and speculative frenzies are constantly taking over the markets. Indeed, the FT recently reported that speculators in Chinese futures markets were having a notable impact on the price of gold. But while the shadow of financial repression and war, as well as the rise of Chinese speculation, may well explain the rise in the price of gold, they do not justify it in terms of the basis of a business case. solid long-term investment. The gold rally is always strange.

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