The ability of consumers to pay for consumption (absent gifts) comes from wage growth and the ability to borrow and service debt (payable monthly from wages). For the past 30 years, wage growth in western economies has been flat and negative in real terms thanks to an increasingly accessible pool of cheap labor in developing countries. What kept the western demand curve growing then, was consumer credit–aided and abetted by falling interest rates. One could buy more with less wages because carrying costs in real terms collapsed to nearly zero. Recently, with central banks trying to (needing to) back out of the zero-rate mess they have orchestrated, the falling rate trend reversed in the most violent turn we have seen in decades.
The below chart shows the more than doubling in US 10 year treasury rates over just the past year from a low of 1.394 last summer to today’s more than 2.9%. This back up in rates is really an unprecedented headwind for continued growth because it is more than twice the increase we have seen in past expansion cycles and it has happened in less than a year, rather than the typical 3-5 years of a more normal business cycle. And because, unlike in more normal, organic growth cycles, household credit is at historic highs and income growth has continued to flat line, demand has no where to go but down. Sustainable support for the S&P at record highs once more?
Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.
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