Tapped Out

Submitted by QTR’s Fringe Finance

The market, once again, held up enough last week to offer the illusion that we could be heading towards a soft landing – and that the Federal Reserve’s strategy of rate hikes isn’t maiming the economy or the market.

But I continue to believe that this is not the case in reality, and that investors could be in for a rude awakening still. Evidence to support my thesis, in the form of new macroeconomic data, continues to stack up.

Those who read me regularly know that I continue to keep myself decently hedged for an asymmetric move to the downside that I have been predicting since the beginning of the year.

Of course, I first began predictions that the NASDAQ would crumble all the way back in November 2021 – about one year ago exactly. I’ve been proven right on this, and several other, predictions, but for one detail: I continue to believe that we are going to experience several days of extreme market turmoil as a result of macroeconomic policy.

As I have stated many times, most notably on recent podcasts, the market and the economy have not yet felt the true effect of 4% rates just yet, in my opinion.

How has the charade been able to continue for this long? Part of it is psychological, but another part of it is that the consumer isn’t yet tapped out. But it’s coming.

Once savings are depleted, the next thing households do is turn to debt. And debt levels are raging higher right now.

Source: Bloomberg

CNBC wrote last week that “households increased debt during the third quarter at the fastest pace in 15 years”. They attributed a large portion of the debt to rising credit card balances – the last escape valve that many consumers have before going completely broke. In fact, credit card debt was staggering:

The credit card balance collectively rose more than 15% from the same period in 2021, the largest annual jump in more than 20 years, according to the New York Fed, which released the report. The increase “towers over the last eighteen years of data,” a group of Fed researchers said in a blog post on the central bank site.

Nobody is paying too much attention (yet) because delinquency rates haven’t yet spiked…but in my opinion, it’s not a matter of if something is eventually going to give out, it’s a matter of when.

Source: NY Fed

The next lines that I am expecting to curl upwards, in similar lagged fashion, are here:

You can read the New York Fed’s entire alarming household debt and credit report here.

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Delinquencies are definitely on their way. When those occur, spending will slow even more and the ripple effects will further penetrate through to equity markets. It may take several more months to become evident, as all of these data points operate with somewhat of a lag. My guess is that the stock market shows the signs well before it turns up in New York Fed data. By the time we see it in the above chart, it’ll likely be too late for markets.

Right now, Jerome Powell is like Nate Diaz fighting Kurt Pellegrino in 2008. He has the entire US economy and stock market in a triangle choke, knows the result of the match is already a foregone conclusion, and is simply waiting for the consumer, the stock market or both, to tap out.

This new data continues to support my prediction that a crash is on its way and – more importantly – that the wheels are already in motion no matter what the Fed decides to do with rates in December.

(Chart via @Zerohedge)

I don’t expect it to be easy to continue to be skeptical as the price of the S&P 500 and the VIX send the signal that things are going swimmingly. To believe that there’s turmoil under the surface means constantly standing down price signals, near-daily Fed speak and an incessant barrage of financial media optimists.

As I wrote last week, sometimes I may just continue to write about these “under the surface” factors to keep my nerves about me.

Over the last two decades, we have been conditioned to buy every dip and assume that markets are going to go back up on on their own. I truly think that this time is different and data continues to support that. Personally, I have several long positions, but I remain very well hedged for a move much lower. My mindset is going to continue until either the Fed changes course meaningfully and several quarters go by, macroeconomic data changes, or the market sinks to a level where stocks once again look affordable (for comparison, the bear market median S&P P/E is around 13x and we are at about 21x right now).

I don’t foresee any of these instances occurring at any point in the near future.

Instead, a “tapped out” consumer continues to add one last dash of debt – and with it, hope – that we can survive peddling the soft landing illusion for just one day longer. Maybe we can – but what about the day after that?

QTR’s Disclaimer: I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.