Juggling Dynamite

Erik Townsend and Patrick Ceresna welcome ECRI’s Lakshman Achuthan to MacroVoices: “The revival in growth that everyone’s kind of banking on, is not here. The slowdown continues.”

Here is a direct audio link.

Further to the discussion. Unemployment lags the Fed hiking cycle and typically accelerates in the months after the Fed pauses (i.e., anytime now). Central banks go back to easing as unemployment claims move higher (in orange below since 1965), and that’s when equity bear markets intensify (S&P 500 in blue). Chart courtesy of John Hussman.

As we head into the most-harangued shopping weeks of the year, it is important to understand that spending patterns are strongly tied to the value of homes, particularly among the so-called upper-middle-class households (defined as income over 100k).

Now that interest rates have normalized and home prices are falling, even those still fully employed are pulling back on spending–and the trend will intensify with layoffs. See Brands Catering to the upper middle class are struggling:

Affluent shoppers often have an outsized impact on shifts in consumer spending because they have money to splurge when times are good but are quicker than the wealthy to pull back when feeling pressured. So a hit to the brands, retailers and shopping malls that cater to richer Americans foreshadows potential weakness ahead for the US economy.

As a proxy for high-income spending, Bloomberg created an affluence index of 30 large retailers and brands across 10 categories — spanning clothing, jewelry and electronics — with average transaction values above their peer group….The retailers and brands in the index experienced a deterioration in sales since January that recently deepened, according to Bloomberg Second Measure, which tracks anonymous US credit- and debit card transactions. Sales for the three-month period from August to October declined at 70% of the companies. The median change in sales reflected a 14% drop — the worst performance in two years.

In more proof that debt-funded spending is financially deleterious in the medium and longer run, following two years of record government handouts, households outside the wealthiest quintile have less cash now than they did when the pandemic began (latest Federal Reserve study of household finances).

And amid years of financial market manipulation and risk-maximizing FOMO (fear of missing out), the average retirement account balance has increased by just $1200 over the past five years.

Now, a rising share of workers are turning to retirement account withdrawals and loans to try and make ends meet. See, Americans are Pulling savings from their Retirement Accounts to pay bills.

The late, great zero interest rate era enabled the levered expansion of private equity (PE) firms, “rolling up” all manner of assets, including private businesses and professional practices.

In areas like health care, where fiduciary duty is paramount, the profit-maximizing focus of PE raises some cause for concern. A lawsuit by the US Federal Trade Commission is now bringing the business model up for review. A similar review of PE roll-ups in the finance and wealth management space is needed too. Here is a direct audio link.

Less than two months after filing a monopolization claim against a private equity-backed healthcare business that sent shockwaves through Wall Street, Lina Khan has a warning for the PE industry: there may be more coming.

The Federal Trade Commission suit filed in September alleges that US Anesthesia Partners (USAP), backed by private equity firm Welsh Carson Anderson & Stowe, snapped up a series of anesthesiology businesses across Texas and then raised prices for their services.

It was the FTC’s first action against so-called roll-up strategies — where PE firms buy up multiple businesses and then consolidate them in order to eke out efficiencies — in decades, and by filing it, the chair of the agency has taken aim at a foundational strategy of private equity.