Juggling Dynamite

US Auto loans that were more than 90 days delinquent in the second quarter were the highest since the second quarter of 2010 (blue line below since 2004, via Arbor Research and The Kobeissi Letter). Auto loan debt held by Americans rose to a record $1.63 trillion (red line), 92% above 2008 levels, while auto insurance costs jumped by 15% in the first half of 2024. The masses are financially strained. The percentage of US consumers expecting to fall behind on their debt has been rising, now the highest since early 2020 at the outset of the pandemic (below courtesy of The Daily Shot).US bankruptcy filings are already the highest in over a decade and more than in 2020 (via Bloomberg).At the same time, the S&P 500 is trading at 3x sales (second only to the 2021 peak) and well above the 2.4x sales paid at the 2000 cycle peak (shown below since 1990, via Bloomberg).The S&P 500’s price-to-earnings ratio has risen with bullish sentiment and equity volatility (euphoria meter in red below since 1992, courtesy of ISABELNET.com) to the highest level in at least 32 years (with S&P 500 price on top in black).

Major retailers have noted a pullback in consumer spending, and same-store traffic is down across restaurants this year, particularly at sit-down chains. Most are ramping up discounts and promotions to lure customers. See, After years of Increases, Companies are Rolling Back Prices:

Retailers, restaurants and other companies spent years lifting prices. Now that consumers are closing their pocketbooks, some companies are turning to discounts to win back business.

Businesses that sell a range of products from IKEA sofas to Air Jordan sneakers have said in recent weeks that they have lowered prices this year. Many companies increased prices in the pandemic when supply chain and labor costs rose, and consumers were willing to pay more.

But demand for many goods that aren’t necessities, such as home furnishings or pricey sneakers, has fallen, leaving companies sellers in a battle for a larger piece of a smaller pie.

Price cuts and slumping demand compress corporate revenue and, finally, profits. US corporate profits, at 12% of GDP, are off all-time cycle highs (top panel below since 1960, courtesy of The Daily Shot) even as stock prices have continued to rise. Historically, corporate profits have reliably been mean-reverting, leading employment lower (bottom panel below) as they fall (unemployment rising, middle panel shown, with recessions in grey bars). Maybe this time is different.

The results of the easy money experiments from 2009 to 2022 are widely evident: they yielded record indebtedness and unaffordable housing. This was especially true in Canada, where the median household debt to income was 175% in the second quarter of 2024 from 156% in the fourth quarter of 2008. At the same time, the average home price soared from 3.3x the average household income in the 1980s to an impossible 9x since 2020 (the source for the chart below is unknown). The US median home price, at 7.2x the median household income, also touched a new all-time high in September, above the 7.1x recorded in 2022 and 6.8x at the peak of the 2006 housing bubble (chart below since 1945 courtesy of The Kobbeissi Letter). Home prices soared 50% in the last five years, nearly 3x the 17% growth in household income.
Statistics Canada reported last week that the gap in the share of disposable income between the wealthiest two-fifths of Canadians and the bottom two-fifths grew to 47 percentage points in the second quarter of 2024—the widest gap since StatsCan first started collecting such data in 1999.

While the lowest 20% of income earners saw a slight rise in their share of disposable income due to wage increases, the middle 60% saw a decrease.

In the second quarter, the top 20% of Canadians held more than 66% of the country’s wealth, averaging $3.4 million per household. By comparison, the bottom 40% of Canadians accounted for only 2.8% of Canada’s wealth.

StasCan noted that the extreme wealth gap driven by the top 20% of income earners was mainly due to investment gains attributed to higher interest rates. See October 10 Statscan Report:

While higher interest rates can lead to increased borrowing costs for households, they can also lead to higher yields on saving and investment accounts. Lower income households are more likely to have a limited capacity to take advantage of these higher returns, as on average they have fewer resources available for saving and investment.

Higher interest rates incentivize saving and rational investment while discouraging speculation, asset bubbles and excessive counter-productive consumption. The collapse in Canadian productivity (below since 1989) undermines our standard of living and demands attention.
As cries build for central banks to slash policy rates back near the lows and governments to resume “free” money handouts, sober analysis begs to differ.