Warnings about impending economic doom (or at least gloom) filled a headline void Wednesday.
Jeff Bezos, noted economist, chimed in. “Yep, the probabilities in this economy tell you batten down the hatches,” he said, captioning a video of David Solomon telling CNBC that “if you’re running a risk-based business, it’s a time to think more cautiously about your risk box.” (Have you thought about your “risk box” lately?)
There’s never a bad time to remind yourself that nobody really knows anything. Economists are famously bereft when it comes to forecasting macro outcomes, which is unfortunate because… well, because “You had one job!” But it’s far from obvious that Bezos, or even Solomon, has a better read on the situation than the much maligned ivory tower crowd.
Earlier this year, some readers suggested Elon Musk’s “super bad feeling” remarks about the macro outlook should be heeded with something like the reverence you’d accord the voice of God. While acknowledging that Musk is “a god” if not “the God” (to quote Phil Connors), this is all just one big echo chamber. Musk’s “super bad feeling” was doubtlessly informed more by media headlines than anything going on at his businesses (I don’t remember him forecasting a “Tesla recession”), and Bezos’s “probabilities” remark was more likely to be a reference to anecdotal accounts and summaries of economic models, than trends at Amazon. Sure, he has great visibility into spending just like FedEx does, but it’s not as if Bezos was down in the basement, talking to an Amazon JARVIS, and heard “Sir, I now calculate the odds of an NBER recession being retroactively declared for the current quarter at 99.45627%.”
What we’ve learned over and over again this year, is that if you want to know whether a recession is right around the corner in an economy that lives and dies by consumption, you have to “ask” consumers, where that means tallying up their savings and spending and drawing conclusions. Asking them in a literal sense (i.e., consumer sentiment surveys) may be a good leading indicator, but record-low readings on the most respected such survey in the country (i.e., the University of Michigan gauge) have yet to be reflected in spending patterns.
If you don’t care about trends in investment banking fees or the slow demise of Goldman’s retail ambitions, the key takeaway from Q3 big bank earnings was the juxtaposition between executives’ cautious comments on the economy and their upbeat take on the consumer. The quotes (below) are from BofA’s and JPMorgan’s quarterly calls.
Alastair Borthwick on early-stage delinquencies in BofA’s consumer book: I think if you went back to our supplement over the course of the past 10 years, you’re going to find these numbers are so low. We’re squinting to see a change here, and it’s coming off of really historically extraordinary numbers. So is there a little bit of movement? Yes. But is it the second best of all time? Yes.
Jamie Dimon on the consumer, broadly: I think, we’re in an environment where it’s kind of odd, which is very strong consumer spend. You see it in our numbers, you see it in other people’s numbers, up 10% prior to last year, up 35% pre-COVID. Balance sheets are very good for consumers. Credit card borrowing is normalizing, not getting worse. So, you go into a recession, you’ve got a very strong consumer.
The headline from Andrew Ross Sorkin’s daily DealBook email on Wednesday was “Main Street 1, Wall Street 0.” I was tempted to lampoon that (e.g., “What’s the score over the long-term, Andrew?”), but then I realized it’s a decent way of capturing the US macro conjuncture and at least vaguely consistent with some of the points made here Tuesday in “Schrödinger’s Economy.” Capital markets activity may be drying up, but consumers aren’t tapped out.
So, it’s just not here yet. The recession I mean. The pontification from Bezos, Musk, Dimon, Summers or whoever else you want to cite (from corporate titans to economists to somebody’s proprietary model), is just idle speculation until Americans stop spending money. And Americans don’t stop spending money until they’re all out of it — and then some. In other words, until their buffers are exhausted and their credit cards are maxed out.
Revolving credit rose by the third-most ever in August, according to the latest update from the Fed (figure below).
The figures aren’t adjusted for inflation, which complicates extrapolation, but suffice to say large increases in variable rate debt in an environment where rates are rising rapidly doesn’t bode well. Or you wouldn’t think so, at least. The commercial bank rate on credit card plans jumped more than 100bps QoQ.
Wages are still rising at an unprecedented rate, but my supposition is that by the time pay growth starts to outstrip inflation (i.e., when real wage growth is positive for all workers), it’ll be too late to save a consumer who, by then, will have run down cash buffers and run up card balances at increasingly onerous rates.
The problem is timing. Every, single day, someone who’s famous says the recession is here. But all the people who aren’t famous keep spending money. Until that changes, the US economy is a both alive and dead. Or “strong as hell,” if you ask Joe Biden.
Now, that options games are over for the week, the equity market is starting to regain its senses. The economy is humming along, inflation is still too high, and the Fed is not done hiking. Dollar up another 1% today, 10yr rocketing higher — pivot seems like wishful thinking by market-watchers stuck in losing positions.
There’s no point at which “options games” are “over for the week.” That’s what I keep trying to tell you folks: Every, single day is a nonsense day to a greater or lesser extent. Tomorrow, I’ll invariably be able to show you how today was also partially nonsense. A sizable percentage of the price action that you see in any given session is not attributable to what you think it’s attributable to. I realize this is (very) uncomfortable for “regular” people, but it’s true. When you look at stock prices now, you’re seeing a derivative. Of their own derivative. You’re watching a screensaver where the colorful swirls are a function of the knock-on effects from day trading in derivatives.
Yeah, I buy that — you’ve been persuasive on that score. But after all the trades have been booked, there are still, or at least I still believe, there are broader trends in play — demographics at the deepest, longest-term level, sentiment in the short term, and macro somewhere in between. There’s nothing China can do to change the fact that its population is going to decline precipitously over the next fifty years, taking economic growth down with it. Globalization is unraveling and support for the frictionless flow of people and capital is in full reverse mode, And in the more immediate here and now, inflation is high and the Fed is leading the way in trying to quash it. That’s good for the dollar and not-so-good for yields and long-duration assets. Will something break? Undoubtedly. But until it does, I think the general-direction trend for markets is pretty clear.
I’m a regular person. About ten years ago I downloaded a simple spreadsheet that generates random price graphs. Using these graphs I was able to detect trends, retracements, bottoms, etc, etc. Lesson learned. Invest like you don’t have a clue. Don’t get “Fooled By Randomness”. And, yes, it’s pretty darn uncomfortable. I read you every day to be reminded that I STILL don’t have a clue. And for the “random” Phil Connors quote. Hat tip for that one.
“risk box”. So the king of boxes is subterranean(ly) thinking brown(ish)…with blue arrows shaped similarly to a rainbow and pointing one direction….with that much $ why bother commenting at all. There’s no cash or credit card in a President’s pocket either. You got to feel it to help. A couple days ago driving back from Tampa to Atlanta I noticed a restaurant in Valdosta had extremely high reviews and served what I really wanted, a grouper sandwich. Recent photos of the menu had it listed and priced. I ordered it and it was excellent, and 50% higher than the recent price as I found out on the check. I love your writing. Maybe when my SSA check goes up in January I will finally subscribe. (It’s cost is counted in various currency- pbj sandwiches, minneola oranges, oysters, no ramen yet.)
We might be well-served to recall JYL’s comment on how impatient pundits and traders are dismissing the notion of an economic slowdown because we have not seen it already.
Only months ago the concensus outlook was for a slowdown to appear in the second half of 2023. Now we are dismissing the possibility of a recession because it has not immediately manifested itself in October 2022?
@derek I don’t think that’s what we’re saying. I would suggest, instead, that anything other than a mild recession is unlikely with the Fed funds rate at this level — i.e., if the FOMC opted to pivot/pause now rather than 2Q23 (or later).
I worry we may be seeing a rewind of the summer of 2008 when Chuck Prince declared “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.” As stupid as it sounds in retrospect, it was rational behavior then given shareholder demands for endless profits.
At that time many of my friends and colleagues had started to question the risk flags flapping in the gale force winds because real estate prices seemed to be holding up well in their own affluent neighborhoods. Oops!
Are we at risk of following a similar path of ignoring the obvious because a slowdown has not immediately appeared? Or is the obvious wrong?
Totally fair analogy. The difference, imo, is that, unlike 2007-08, the risks are less hidden. The big one, will the Fed hike us into a major recession, is top of mind for everyone. And the jury is still out on that. I’m not an institution with billions under management, so I feel as if I have enough flexibility and (hopefully) nimbleness to allocate as circumstances dictate. Hope that applies to everyone who reads H.
Most US homeowners have mortgages. Most refinanced in the past two years. As a result, middle class homeowners freed up substantial amounts of liquidity. Add wage inflation, and you get a healthy consumer despite inflation
Bingo, the home ownership rate is 65%+. Most of those people are sitting on massive equity gains that can withstand a significant downturn in housing prices and locked in historically low interest rates.
Jeff Bezos’ Economics 101:
Bezos-Scott= -38,000,000,000.00
I am pretty sure that the correct algebraic equation, at least since 1993 (which happens to be the year of their marriage and the year prior to the year Amazon was started) is this:
(B + S) – S = B
Musings about the terminal FF rate are sliding up to >4.5% (from FOMC members) and to >5.0% (from commentators).
A Treasury long bond buying program, or a Fed tweak to bank capital requirements, could allow the Fed to push rates that high, or higher, before reaching “breakage”. I don’t know how much higher this would push the 10Y. We might instead plumb unfamiliar depths of yield curve inversion. In 1980 the 10Y – 2Y was inverted by almost 200 bp.
H-Man, timing is everything and as you point out, no one has consistently read the tea leaves accurately when it comes to timing. When prices go up and cash flow remains the same, Occam’s razor suggests spending will decrease since the cash flow can’t support the price increases. But Occam’s razor doesn’t tell us when that decrease in spending occurs. Which takes us back to the circular loop of this logic – when does the consumer hit the wall? Most likely, when they run out of money (which means the cards are maxed or the home equity/reverse mortgage lines have been tapped). If interest rates continue to rise, that day of reckoning will be arriving sooner rather than later. But when is sooner? Since I believe the terminal rate will be closer to 6 rather 5 due to very sticky inflation, it would seem next summer will provide the answer.
May I get you good people’ sense on this spending patterns?
I have to say, it kind of harden me against pleas from the bottom 90% of the population. If the only thing you can think of doing when receiving extra income is go and burn it in a frenzy of consumption, then I’m going to have rather less pity the next time you come crying you don’t have $400 in savings to fix your car to go to work.
NB: I understand this sounds rather moralistic. And maybe it is. But my main concern is macro. If people aren’t careful, macro swings are amplified, which means running the economy “just right” get even more complicated it’s already is and it multiply the chances of an accident. Those aren’t morality concerns by and large.