Juggling Dynamite

US credit card debt topped $1.34 trillion in February, significantly above the cycle tops of around $900 billion in 2008 and 2020 (as shown below since 2003, courtesy of MFHOZ). The interest rate on this debt is above 20%.New car loans (5-year term) at 8.22% are above the 2007 rate peak (shown below courtesy of Liz Ann Sonders). Compounding the pain is that most who bought vehicles (and many homes) in the 2019 to 2023 pandemic price spike have seen their equity fall since.

In 2023, borrowers with credit card and auto loan delinquencies (90 days plus late on payment, shown below courtesy of Mr.Awsumb) had already reached levels matching the 2008 recession. All debt-type delinquencies have continued to rise year to date. While the US ‘U3’ unemployment rate remains near all-time lows of 3.8%, individuals saying they defaulted on mortgage payments due to unemployment have already spiked above 2008 levels (source link here).
We note that the broader ‘U6’ measure of US unemployment at 7.3% in the latest measure is now 80 basis points above its cycle low and higher than the pre-COVID level of 6.9%.

Canadian unemployment at 6.1% in March was +130 basis points above the July 2022 low of 4.8% and higher than the pre-COVID level of 5.7%. Historically, when the Canadian unemployment rate rose 80 basis points from the cycle low, a recession was underway. And lest anyone forget, it’s typical for unemployment to accelerate during central bank easing cycles and well into the subsequent economic recovery.

It’s not just individuals falling behind on their payments; loan delinquencies on multifamily properties are today the highest since 2013 and the 2008 recession before that (below courtesy of Game of Trades). Corporate bankruptcy filings have been leaping since the Fed started hiking base rates in March 2022, both in America and Canada (shown below).
Again, it’s worth noting that central bank easing cycles have never been a quick fix to debt stress pandemics. Just as tightening efforts move at a 12 to 24-month lag, defaults and bankrupty filings tend to accelerate as central banks embark on easing efforts and unemployment continues to rise.

Jeremy Grantham is the Co-Founder and Long-Term Investment Strategist of GMO, which manages over $60B. Jeremy discusses his background and shares fascinating insights about a broad range of topics including investment bubbles, AI, crypto, reversion to the mean, climate change, population growth and natural resources. Here is a direct video link.

Canadian GDP per capita declined for the 6th consecutive quarter in the final quarter of 2023; this means there are less resources per person–the standard of living is in decline.A new RBC study finds that more than half – one million – of 1.9 million new Canadian households by 2030 will not be able to buy a home if affordability remains close to where it is today. Worst, more than 40% of the new households that can’t buy a home will also not earn enough to afford rent at the market price.

This is not because Canadian incomes are low relative to other nations, it’s because home prices and rents have been allowed to gallop ahead thanks to monetary and fiscal policies aimed at price inflation.

The video below offers a worthwhile overview of the similarities between the Canadian and Australia economies and how the necessary phasing out of fossil fuels will require signficant capital investment and new fiscal and monetary policies for both. We must tax what we want less of and enable what we need more.

Australia 🇦🇺 and Canada 🇨🇦, even though they’re far apart, actually have a lot in common when it comes to their economies. They both rely a lot on selling commodities like minerals and oil, which can be risky. Also, both countries deal with challenges in their housing markets because of immigration 🏠, which drives up prices in big cities. Plus, they’re both trying to figure out how to boost innovation and productivity 🚀. Australia has seen some success with economic reforms that helped its economy grow, while Canada is still figuring out how to deal with its heavy dependence on oil and gas exports ⛽️. In a world full of uncertainty, both nations are working hard to make the most of their economic strengths while tackling their weaknesses. Here is a direct video link.